There is a high uncertainty surrounding FOMC announcements. Upon the announcement the uncertainty is resolved. There has been found a risk premium associated with the period prior to announcement. See our post "FOMC Risk and Resolving Uncertainty".
Additional research has further decomposed the risk prior to FOMC announcements and finds that there is a sizable left-tail premium that is unique to FOMC announcements and is not found in other macro announcements. See "Fed Tails: FOMC Announcements and Stock Market Uncertainty" This left-tail uncertainty predicts rate decisions and is a concern with FOMC members. Researchers suggest that this premium is attributed to supply shocks in the crash insurance market.
Investors worry about downside risk from an FOMC announcement and will go to the options market to buy protection. This protection cost is then embedded in prices and is be displayed in premiums. The size of the premium is related to whether there is expected a positive or negative announcement shock.
Investors should be able to see the market premium tilt and determine the expected FOMC action. When faced with downside risk from monetary uncertainty, investors will seek protection which disrupts prices prior to the announcement. Someone must take the other side of crash insurance. Watch option behavior and you can measure investor downside fear.
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