Federal Reserve Officials Underperfom Stock Market

Federal Reserve Officials Underperfom Stock Market
Photo by Joshua Woroniecki / Unsplash

In September 2021, media reports indicated that two Federal Reserve heads carried out multiple large transactions during 2020. According to Yahoo Finance, "...both [Fed heads] were instrumental in engineering the Fed’s response to the financial fallout from the COVID-19 pandemic." Both heads later promised to discontinue trading during their tenure, but both eventually announced early retirements.

In the aftermath of the public's outcry, Cody Couture, Assistant Professor of economics at Hamilton College, and Abhiprerna Smit, PhD candidate in Economics at UC Irvine, co-authored a study titled "Stock Returns of Federal Reserve Officials." In the study, they actually review a total of three Fed reserve officials since "financial disclosures in 2021 showed that three members of the Federal Open Market Committee (FOMC) had actively traded in 2020."

This paper examines the trading behavior of members of the Federal Reserve’s Federal Open Market Committee (FOMC). We calculate the financial market returns of FOMC members relative to the overall market and examine if there is any evidence of abnormal returns. We also test whether FOMC members exhibit evidence of market timing around FOMC meeting dates. In both cases, we find no evidence of abnormal returns.

Ironically, that fact that they found "no evidence of abnormal returns or market timing" might be even more concerning. In the paper, Couture and Smit elaborate further, "...to the extent that there is any difference between the returns of the FOMC and those of the overall market, it would appear that the FOMC is underperforming the market..."

I mean, aren't the people in charge of The Fed supposed to be some of the brightest financial minds on the planet?