Relief Rallies after FOMC Announcements as a Resolution of Uncertainty

We find substantial positive average stock returns after FOMC announcements accompanied by the release of the Summary of Economic Projections (SEP) and press conference by the Fed Chair. A simple trading strategy of buying index futures contracts five minutes before the announcement and closing the position 55 minutes after the release would have generated an annualized Sharpe ratio of 2.10. We show that the market uncertainty, measured by the VIX index, declines significantly after FOMC meetings followed by SEP releases. After controlling for changes in the VIX, the positive post-announcement returns disappear, suggesting that these returns are related to the resolution of uncertainty after the announcement.