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Every year, we write a special issue of our Fixed Income Focus series devoted to gauging the market impact of Fed communications. Our focus here is on Fed communications during 2010. Consistent with the methodology introduced and used in previous years, we ranked FOMC members by the effects of their communications on the two-year Treasury yield.[1] We examine the market effects, not only of speeches, but also of television and radio broadcast interviews, as well as written communications in the media (such as Op-Ed articles). For simplicity though, unless otherwise noted, we shall refer to all individual communications by an FOMC member generally as speeches.[2]
We considered only those remarks that had at least some forward-looking content on monetary policy or the economic outlook. We measured the market impact of a speech as the change in the two-year Treasury yield in a window that begins 15 minutes before and ends two hours after the speech. When other economic data releases took place within this 2¼-hour window, we either shortened the window or excluded the speech altogether. This helps us better isolate the market impact of the speeches included in our analysis.[3]And the Winners Are…
This year’s “I Moved Markets Award” goes again (not surprisingly) to Chairman Bernanke: Among all FOMC members, his communications with the public had the largest impact on the two-year Treasury yield, where we measured the total impact as the sum of the absolute value of the market impact of each of his speeches.The Chairman also gets the “Power Player of the Year Award,” for having the largest impact per speech. This “honor” had been bestowed upon President Plosser last year.As for the “Market Neutrality Award,” given to the FOMC member with the least net impact on the market, it goes to Vice Chair Yellen this year. This is an impressive feat because her speeches are always rich. In addition, despite her dovish inclinations, she is viewed as close to the Chairman and, thus, her speeches could be interpreted as reflecting where the Chairman is leaning.
Market Reaction to Speeches by Individual FOMC’s Members
Figure 1 shows, for each FOMC member, the sum of the absolute value of the impact of each of his or her communications with the public. Not surprisingly, Chairman Bernanke was the clear winner in this category: His speeches and interviews moved the two-year Treasury yield roughly 50 basis points last year. St. Louis Fed President Bullard was not far behind, with approximately 45 basis points, but note that the impact of the Chairman’s semiannual testimony on the Monetary Policy Report to the Congress is analyzed separately. If included, the monetary policy testimonies would further amplify the Chairman’s dominance.
Market Response Per Speech
Of course, the results in Figure 1 fail to take into account the fact that some FOMC members speak more often to the public than others, and, thus, have more opportunities to affect market prices. For instance, as shown in Figure 2, our database includes 33 speeches by the Chairman and 36 speeches by President Bullard.[4] In contrast, we have only four speeches for Governor Tarullo and President Pianalto, and no speeches for Governor Raskin, who became a Board member in October 2010. It might be more interesting, therefore, to assess the influence of FOMC members using the market response per speech, as shown in Figure 3.
On a per-speech basis, Chairman Bernanke is also the winner, though he is now followed closely by current Board Vice Chair Yellen and former Board Vice Chair Kohn. Chairman Bernanke takes the crown from President Plosser, last year’s winner. President Plosser’s communications were close to the market expectation last year.The fact that the runners-up in 2010 were the current and former Board Vice Chairs is noteworthy because it suggests that the market was especially attuned to communications by FOMC members who are perceived to be closest to the Chairman. President Dudley and Governor Warsh fall in his category too, but their speeches seem not to have deviated from market expectations by as much as those of Vice Chairs Kohn and Yellen.As in previous years, public communications by the more hawkish members of the Committee continued to elicit a measurable market reaction, despite the fact that the FOMC is dominated these days by a center-dove coalition that is aligned with the Chairman. President Hoenig is a case in point: He dissented at every single meeting last year, making it very clear that he was out of the Committee’s mainstream. Yet, his communications nevertheless did matter in the eyes of the market, inexplicably in our view, perhaps because they helped the market see both sides of the policy debate.It is interesting, and a bit surprising, that the winner of the “Power Player of the Year” award in 2010, on average, moved the two-year yield just 1½ basis points. This is really almost nothing! But a key point here is that the Chairman makes two different kind of speeches on the outlook and monetary policy: “continuity” speeches and “message change” speaches. The former hardly move markets, as should be expected, while the latter have important effects. For example, the Chairman six times last year moved the two-year yield by more than three basis points and twice about six basis points.Members’ “Market Neutrality”
We also examined the net directional effect of each FOMC member on Treasury yields, measured as the sum of the market impact of his or her speeches. While the majority of FOMC members pushed yields higher in 2009, the opposite is true for 2010. On net, FOMC speeches pushed yields down more than 40 basis points.
At first glance, it may seem as though each speaker’s net directional effect has something to do with his or her position on the hawk/dove spectrum. After all, it might seem that hawks, such as Presidents Lacker, would push yields up more than doves, such as Board Vice Chair Yellen and President Dudley, at least in a relative sense. But what matters for the market response is the extent to which each speech is different from what the market expected from that particular member (the “surprise”): For instance, even a hawkish speech by a hawk can drive yields lower if the speech was not as hawkish as anticipated.Our analysis of each speaker’s market effect suggests that three of the most influential members of the Committee—the Chairman, former Vice Chair Kohn, and President Dudley—all put significant downward pressure on yields. This is consistent with the idea that they pushed back market expectations of early rate hikes.The strong directional effect of speeches by the Chairman, President Dudley, and former Board Vice Chair Kohn is, to a degree, surprising. While they are excellent barometers of the future path of policy, there are official forms of communications that are supposed to fully convey such information, such as FOMC minutes and statements. This tells us that the minutes and the statements were either not detailed or frequent enough. Indeed, the FOMC was very conservative with its language in the statement. As much as possible, it adopted a cookie-cutter approach to the language: It left its rates guidance intact for the entire year, while it made changes to its discussion of asset purchases only when it was absolutely necessary. Moreover, important changes in the statement were often telegraphed via speeches. For example, by the time the resumption of asset purchases was announced at the November meeting, it had already been strongly signaled through speeches. In this sense, FOMC speeches apparently were a powerful tool for communicating the posture of the Committee, notwithstanding the difficulties of conveying a unified, consistent message.Notable Speeches
A few speeches stood out to us for their substance. The first was Chairman Bernanke’s testimony on exit strategy before the House of Representatives in mid-February. The market had already begun to contemplate exit strategy, and this speech was widely anticipated to provide some answers to many related questions. The Chairman outlined the sequencing of the steps that would be taken as accommodation was removed. The two-year yield rose four basis points in the window bracketing this testimony.A second speech of note was by then-San Francisco Fed President Yellen, in late March. The timing was particularly significant because it was her first speech after she was nominated to the Federal Reserve Board. Although her main message was dovish, she was careful to assert her inflation-fighting credentials, perhaps in anticipation of vetting by Congress. She cited her votes for raising rates—“on 20 different occasions”—and said “the Fed has to be ready to take away the punch bowl when it’s necessary.”[5] Her speech caused the two-year yield to rise five basis points.The third notable communication by an FOMC member was the publication in late July of St. Louis Fed President Bullard’s research paper signaling support for quantitative easing. At the time, the incoming data suggested that the economy had lost momentum in the first half of the year. President Bullard was the first FOMC member to speak in favor of additional large-scale asset purchases (LSAPs), specifically to avoid a deflationary outcome. This was especially significant because he was previously seen as leaning hawkish, so his thoughtful support for a move to ease was particularly powerful. Still, there was no discernable movement in the two-year yield around the release of his paper.Impact of FOMC Communications on Yields in 2010
Of course, the FOMC doesn’t just communicate with the public via speeches and media interviews. Minutes and statements are also important. Still, the reaction of yields to FOMC statements dropped dramatically last year, both in absolute terms and in relation to the reaction to the minutes. As shown in Table 1, the cumulative absolute impact of statements on the two-year Treasury yield was 15 basis points last year, compared to 43 basis points in 2009. The reaction of yields to the minutes was little changed from last year.
We have already mentioned one explanation for the steep drop in the market response to FOMC statements last year: The FOMC was very cautious about tampering with the rates guidance and discussion of asset purchases, so this created some room for individual FOMC members to convey adjustments in the perceived policy stance. In addition, the decline in the market impact of statements likely partly reflected the relative “calm” in the markets last year, at least relative to the turbulent years of the crisis, when the FOMC was often announcing new programs and initiatives aimed at a new facet of the crisis.One striking observation regarding the relative impact of speeches and statements last year was the fact that the immediate market reaction to the FOMC’s decision at the November 2010 meeting to resume asset purchases was relatively muted. In contrast, the March 2009 announcement of the expansion of asset purchases caused an immediate sharp decline in Treasury yields. One explanation for the different pattern is the role that FOMC speeches played in shaping market expectations of further asset purchases ahead of the November announcement. As the incoming data in mid-2010 pointed to a potential slowdown in the recovery, FOMC speeches had begun to exhibit an easing bias. Thus, by the time the FOMC officially announced its intention to buy more assets, it was no longer such a market-moving event.Of course, to the extent that the market has come to focus more on speeches and, maybe, less on FOMC statements, a potential drawback is that speeches are less precise indicators of future policy—that is, they are “noisier.” Any FOMC member who wishes to express his or her views may do so (naturally, within the confines of blackout periods). It is up to the market to try to sort out which speakers really matter. As we have said before, keeping track of who said what may be fun, but ultimately, one should listen to the Chairman.[6]On net, how did different types of FOMC communication impact the two-year yield last year? As we mentioned earlier, on balance, FOMC speeches alone caused a 40-basis-point decline in the two-year yield. FOMC statements, minutes, and testimonies put additional downward pressure on yields, such that the total impact of all FOMC communications was a decrease of almost 55 basis points. In contrast, in 2009, testimonies and statements almost completely offset the effect of speeches.
The Bottom Line
Market participants continued to pay very close attention to FOMC speeches for any additional information about the future paths of interest rates and asset purchases. Given the lower frequency and guarded nature of official FOMC policy releases last year, it did not surprise us much that the market would turn to FOMC speeches for more detailed information. In particular, and for good reason, the market paid especially close attention to the Chairman, for he is the one who “owns the room.” Speeches by other FOMC members matter too, but none of them matter as much as those by the Chairman. He was the winner of both the “I Moved Markets” and “Power Player of the Year” awards.The Chairman’s dominance may be further enhanced with the introduction of quarterly press conferences this year. As we noted in a recent commentary, while press conferences may help the Chairman hone his message, there is always the risk that the message could get lost or misinterpreted during the give and take of a press briefing.[7]
2011 will very likely be an even more challenging year than 2010 was for FOMC communications. In particular, we expect the first exit steps to be communicated and implemented this year, including the end of reinvestments of MBS paydowns and changes in the guidance provided by the statement (“the extended period” and “exceptionally low” phrases). We are already on the lookout for this year’s “market movers.”
[1] Please see our related Fixed Income Focus commentaries, “Who Moved Markets in 2007 and 2008?” July 22, 2008, “Who Moved Markets in 2006?” February 6, 2007, and “Who Moved Markets in 2009?” April 8, 2010.[2] By “members,” we mean all Fed Governors and all Federal Reserve Bank presidents, including those who did not have a vote last year.[3] Of course, we are aware that other factors, including noise, drive fluctuations in yields. Our assumption here is that they average out to zero during the measurement window, such that we attribute the full movement in the two-year yield within the window to the news element in the speech.[4] The number of speeches by President Bullard jumped dramatically, from 12 in 2009 to 36 in 2010. This partly reflects the fact that the Committee discussion firmed last year to possibly restarting asset purchases, and President Bullard had very strong views on how to do so.[5] Please see “Yellen Says Fed Needs to Be Prepared to ‘Take Away Punch Bowl,’ ” by Vivien Lou Chen, Bloomberg News, March 23, 2010.[6] Please see our Policy Focus commentary, “Counting Heads: Does It Matter?” July 1, 2010.[7] Please see our Policy Focus commentary, “Fed Press Conferences: A Good Idea?” February 3, 2011, and our At a Glance commentary, “Preview a Smash, Ready to Go Prime Time,” March 24, 2011.
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The New York Times published an Op-Ed by Larry Meyer in Friday's Paper.
ANY American who has shopped for groceries or pumped gasoline in the last few months knows that prices for food and energy have been soaring. Demand from fast-growing Asian economies is one major contributor to price increases; the turmoil in the Middle East is another.
All of this has made some economists and lawmakers in the United States nervous. They fear that higher prices for commodities will translate into higher prices for all goods and services and that the Federal Reserve, by ignoring commodity prices, has become lax on inflation.
While the anxiety is understandable, the fears are misplaced. They result from a profound misunderstanding about whether food and energy prices today help predict overall inflation tomorrow.
Read the full piece at nytimes.com.
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The U.S. and other members of the G-7 recently intervened jointly in the foreign exchange markets, selling yen. Does this have any implications for the current stance of U.S. monetary policy? No!
This is from a longer commentary, published on March 22, 2011, that is part of MA's Monetary Policy Insights Service.
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We see no direct implications for current Fed policy, but, indirectly, the Treasury's MBS-sale program could provide valuable insights to the Fed.
This is from a longer commentary, published on March 21, 2011, that is part of MA's Monetary Policy Insights Service.
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Monthly GDP declined 0.8% in January, partially reversing a 1.4% increase in December. Monthly GDP has been on a choppy, but rising trend over the last several months. The January reading reflected declines in inventory investment, net exports, and domestic final sales. The latter was largely accounted for by a decline in construction spending. The level of monthly GDP in January was 0.2% below the fourth-quarter average at an annual rate. Our latest tracking forecast of 2.7% growth of GDP in the first quarter assumes average monthly increases of 0.6% per month in February and March.
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The meeting will likely be focused on new developments affecting the outlook since January. These developments point to a downward revision to expected growth this year and, maybe, next.
This is from a longer commentary, published on March 12, 2011, that is part of MA's Monetary Policy Insights Service.
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