What's the Big Idea? A Fed Researcher Tells You How to Trade the Fed

The video discusses a Fed working paper by Michael Bauer, which examines market reactions to FOMC policy rate announcements. It highlights that market uncertainty decreases sharply on announcement days and provides a trading strategy to exploit this pattern. The strategy involves selling at-the-money puts and calls before FOMC meetings and closing the position shortly after, benefiting from declining implied volatility. The paper suggests this approach can yield significant returns, offering a new perspective on the phrase 'Don't fight the Fed.'

What is the main focus of Michael Bauer's Fed working paper?

• The impact of FOMC announcements on market uncertainty

• The effect of inflation on interest rates

• The role of the Fed in economic growth

• The relationship between unemployment and monetary policy

According to Bauer's findings, what happens to market uncertainty on the days of FOMC announcements?

• It remains unchanged

• It fluctuates unpredictably

• It increases significantly

• It decreases sharply

What trading strategy does Bauer recommend to profit from changes in market uncertainty?

• Buying futures contracts

• Short straddle strategy

• Long straddle strategy

• Investing in bonds

When does Bauer suggest opening and closing the trading positions to benefit from the FOMC meetings?

• Open a month before and close a month after

• Open the day before and close the day of or after the meeting

• Open a day after and close a week later

• Open a week before and close a day before

What potential returns does Bauer's strategy suggest for near-term contracts?

• 25 to 30%

• 5 to 10%

• 15 to 20%

• 1 to 2%