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When Jerome Powell speaks, the markets shudder


When Federal Reserve Chairman Jerome Powell speaks, markets listen and move — even more than they have had to do before Fed chairmen.

The late-afternoon stock market plunge in response to the Fed chief’s press conference on Wednesday illustrated a trend identified in an analysis by two Harvard researchers in February. Powell’s offbeat words at news conferences about interest rate hikes often roil financial markets, usually pushing in the opposite direction of the Fed’s policy committee’s official statements and causing far more volatility than previous Fed chairs Janet Yellen and Ben Bernanke.

The study highlights the Fed chairman’s outside influence on financial asset prices and suggests that Powell’s news conferences could undermine the Fed’s goal of being as predictable as possible.

Traders often buy and sell based on the direction they assume the Fed’s key interest rate will move in the future. Official statements released by the Federal Open Market Committee announcing interest rate-setting decisions offer some insight into the Fed’s thinking.

The Fed chairman’s press conferences immediately afterward — when he or she can speak in the open — could provide even more fuel for speculation.

Stock and bond prices have moved up and down much more for Powell than for his two previous predecessors, and are more likely to reverse the impact of the more deliberate official announcement, according to a working paper published in February by a Harvard economics graduate student. students Namrata Narain and Kunal Sangani.

“Chairman Powell is more likely to trigger large market reactions, often in the opposite direction of initial reactions to the FOMC statement,” the researchers wrote.

Researchers ruled out the explanation that the market itself is simply more volatile in the pandemic era than it was under Bernanke, who gave the press conferences after the FOMC statement when he chaired the Fed from 2006 to 2014, and Yellen, whose tenure lasted until Powell took over in 2018

The increased impact of press conferences could hurt the Fed’s efforts to make its intentions clear to traders, Narain and Sanghani wrote. The central bank tries to communicate its policy thinking as clearly as possible on the theory that the public’s beliefs about future inflation can be something of a self-fulfilling prophecy.

“The FOMC statement no longer appears to be the ‘last word’ on the monetary policy path to markets, and there is less resolution to uncertainty about the path of future interest rates,” the researchers wrote. “On the other hand, with the U.S. economy facing the highest levels of inflation and the steepest set of interest rate hikes in decades, perhaps extraordinary times call for such a change.”

Joanna Swanson

Joanna Swanson is Europe correspondent at the Thomson Reuters Foundation based in Brussels covering politics, culture, business, climate change, society, economies and inclusive tech. With specific focus in breaking news, she has covered some of the world's most significant stories.