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This edition was written by Sarah Ahmad, Andrew Rosin, and David Wessel.
Benjamin Knox and Annette Vissing-Jorgensen of the Federal Reserve Board synthesize current research on how Fed actions affect the stock market across three time frames: announcement windows, the 24 hours before announcements, and the full FOMC cycle. In the half-hour window around FOMC announcements, a 20-basis-point rate increase results in a 1% stock market loss. About three-quarters of this effect comes through changes in Treasury yields; the rest reflects shifts in equity risk premia or expected cash flows. A large share of average excess stock returns around FOMC meetings occurs before the formal announcement: from 1994 to 2011, the S&P 500 earned an average excess return of 49 basis points in the 24 hours before scheduled FOMC announcements —enough to account for about 80% of annual realized excess stock returns over those years. The authors note that the source of this pre-announcement drift remains unsettled, but possible explanations include compensation for Fed-related risk, delayed processing of public information, or informal communication before formal announcements. Over the broader FOMC cycle, stock returns are about 12 basis points higher in even weeks of the cycle than in odd weeks. This pattern is consistent with the timing of Fed internal deliberations, suggesting that information generated during those deliberations may reach markets before formal announcements, possibly through informal communication.
Increased ICE enforcement activity during President Trump’s second term has reduced employment for undocumented workers who remain in the U.S. but has not boosted employment for U.S.-born workers, Elizabeth Cox and Chloe N. East of the University of Colorado, Boulder, find. Using data on ICE arrests from the Deportation Data Project, the authors compare employment in immigrant-intensive sectors across areas with and without a large increase in enforcement activity between January and October 2025. They estimate that heightened ICE activity caused a 4% reduction in the employment rate for undocumented workers in these sectors, with particularly large effects for male workers. They find no effect of ICE enforcement on the employment rate of U.S.-born workers in immigrant-heavy sectors; in fact, heightened enforcement led to a 1.3% decrease in the employment rate for U.S. born males with a high school education or less. The authors conclude that the current deportation campaign has created a stronger “chilling effect” than previous campaigns: six undocumented workers stopped working for each ICE arrest between January and October of 2025, compared to 2.3 undocumented immigrants who stopped working for each arrest during the first Obama administration.
How do changes in the federal funds rate—the Federal Reserve’s primary monetary policy tool—affect households’ expectations and consumption decisions? Surveying more than 25,000 U.S. households, Francesco Grigoli of Georgetown and co-authors find that households would marginally reduce overall spending and durable goods purchases in response to an increase in the federal funds rate. The consumption response is driven primarily by households’ belief that higher interest rates lead to higher inflation, leading households to moderate spending as they deal with a higher cost of living or greater uncertainty This differs from the mechanisms emphasized in standard models, in which higher policy rates reduce consumption by encouraging households to postpone spending and by weakening real activity and income. Households also report that they would move money from stocks to bank deposits in response to a higher federal funds rate. This reallocation is driven by higher inflation expectations, lower expected stock returns, and higher expected house prices, which households associate with greater financial risk and a need for more liquid savings. Finally, households say they would be more likely to ask for a pay raise, look for a higher-paying job, or work more hours in response to both an increase and a decrease in the federal funds rate, suggesting that monetary policy actions in either direction signal greater uncertainty.
"Overall inflation—as measured by the Personal Consumption Expenditures price index—rose to 3.5% in March. The combination of higher tariffs and energy prices has contributed about a percentage point to that figure. I expect inflation to remain elevated and above the FOMC’s longer-run 2% goal for the next few quarters, largely due to those two factors," says John C. Williams, President of the Federal Reserve Bank of New York.
"The effects of tariffs continue to be borne overwhelmingly by domestic producers and consumers, and they have not yet fully played out. I anticipate the pass-through of current tariffs to prices to be mostly completed in the next few months and therefore their effects on the inflation rate to fade. However, I also expect there will be a new round of tariffs in the coming months, which would put additional upward pressure on import prices.
"In addition, the Middle East conflict has brought about a surge in the price of oil and other energy and non-energy inputs. Along with the rising cost of fuel, there are also pass-through costs in the form of higher airfares, groceries, fertilizers, packaging, and other consumer products.
"Notable supply-chain disruptions have also emerged….This echoes the severe shortages and supply disruptions that the world economy experienced in 2021 as it emerged from the pandemic.
"Unlike then, the labor market is not adding to inflation pressures….This is reassuring, since one lesson from the post-pandemic period was that a perfect storm of higher input and labor costs led to larger-than-normal pass-through to prices, exacerbating the inflationary effects of the shocks. In addition, underlying inflation outside of imported goods and energy has so far remained stable, and there are still no signs of significant second-round effects from tariffs spilling over to the rest of the economy."
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