Investors weren’t surprised when the Fed hiked rates by a quarter point last Wednesday, but stocks nevertheless nosedived after Fed chief Jerome Powell warned about the economic outlook.
Some analysts say the real cause for the slump was treasury secretary Janet Yellen, who was talking at the same time as Powell and who ruled out a broad expansion of bank deposit insurance. New research from the Centre for Economic Policy Research shows Fed press conferences, first introduced in 2011 by then-Fed chief Ben Bernanke, are increasingly shaping market expectations.
Between 2011 and 2020, the press conferences tended to reinforce the Fed’s initial interest rate statement, with markets moving in the same direction during the press conference as they did when initially reacting to the statement. Market volatility has been three times greater during press conferences held by Powell than those held by his predecessors, Bernanke and Yellen, however.
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Not only are Powell’s conferences more volatile, they tend to reverse the market’s initial reactions to the Fed statements. This reversal is “systematically linked” to the words used in Powell’s speeches. Increased macro volatility is not likely an explanatory factor, say the researchers. Trading around Fed statements, always a difficult business, is more unpredictable than ever.