Monetary Policy & Mutual Fund Flows

The Federal Open Market Committee (FOMC) of the Federal Reserve sets a target for the federal funds rate (FFR) in an effort to influence the money supply, and in turn the broader economy. This, along with more uncommon actions like quantitative easing, is monetary policy.

In a world of efficient markets, all known information is reflected in securities’ prices. Because monetary policy decisions reflect an economic outlook, market participants price anticipated FOMC moves before they occur. But the FOMC can act in a way contrary to the priced expectations; this is referred to as a monetary policy surprise.

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