Federal Open Market Committee Rate Disclosure and Analyst Cash Flow Expectations

This study examines how market participants update cash flow expectations in response to monetary policy announcements. Using Federal Open Market Committee meetings to identify disclosures of the federal funds rate, a major monetary policy instrument, and analysts as surrogates for sophisticated investors, we document that analysts overreact to unexpected rate news, as evidenced by increased forecast optimism. We propose that the high salience of FOMC disclosures dominates information frictions inherent in processing rate news to explain analyst overreaction. Higher forecast optimism leads to inflated earnings expectations and larger forecast errors, and stock overpricing. Our evidence suggests that FOMC disclosures are inefficiently transmitted to the economy by inflating market participants’ cash flow expectations.