Understanding the Impact of Federal Reserve Announcements in Emerging Markets

Abstract

Since the Financial Recession, the voice of the US Federal Reserve has grown increasingly important in global nancial markets. This study examines the influence of FOMC statements on exchange rates and equity indices in emerging economies. Empirical results reveal that countries react differently in severity and duration to to the tones of statements. Further investigation into credit inflows draws a connection between US monetary policy and emerging market credit channels. Together, the findings suggest that a proposed set of transmission mechanisms can explain most of the reactions of emerging markets to FOMC statements. In a separate section, this study uses machine learning techniques to explore the predictability of FOMC statements on treasury yields. While the algorithms produced generally weak results, further research into machine learning can mitigate the limitations to available data.