This paper investigates the relationship between market liquidity and equity returns around scheduled Federal Open Market Committee (FOMC) meetings. We document significant time-series heterogeneity in liquidity conditions across meetings, even in the highly liquid E-mini S&P 500 futures market. We show that ex-ante excess liquidity contains substantial predictive power for post-announcement returns, which have traditionally proven difficult to forecast. Our findings are consistent with a time-varying liquidity premium: periods of low pre-announcement liquidity are associated with lower pre-announcement returns and higher post-announcement returns. We show that this liquidity channel remains a robust determinant of FOMC returns even after controlling for proxies for risk aversion, investor positioning, and monetary policy shocks.
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