Given all this, it should come as no surprise that research published by the Center for Economic Policy Research on “The market impact of the Fed press conference” came to two notable conclusions. First, that “market volatility is higher during FOMC conferences… especially the case for press conferences given by current Fed Chair Powell.” Second, that since the start of the pandemic “stock and bond markets have tended to move in the opposite direction during press conferences compared to their initial reaction to the FOMC statement. This reversal in direction is systematically linked to the words used in Chair Powell’s speeches.”
These two findings have intensified recently judging from my monitoring of yield behavior, cementing the unfortunate shift from providing signals to amplifying noise. No wonder forecasters and traders show little hesitation in consistently ignoring the central bank’s guidance, including for policy rates that are fully set by the Fed. They are doing so again now by pricing in notable rate cuts in 2024.
Both the quantity and quality of Fed communications need reviewing. It is not just about following Aaron Burr’s advice to Alexander Hamilton to “ talk less, smile more,” in Lin-Manuel Miranda’s musical. It is also about being more attuned to the potential market impact of what is said — especially when it comes to the signals from noisy data releases that can easily be negated by subsequent numbers — strategically anchoring more of their views and being attentive to consistency in their messaging.
Finally, and this lies outside the Fed’s purview, there is a need to improve the communication setup that matters most for the accountability of monetary policy — that involving the semi-annual questioning of the Fed chair by Congressional committees.
Without progress in all these areas, Fed policy will be less impactful and, in the long run, the central bank will undermine the political autonomy that is so critical to its effectiveness.
Mohamed A. El-Erian is a Bloomberg Opinion columnist. A former chief executive officer of Pimco, he is president of Queens’ College, Cambridge; chief economic adviser at Allianz SE; and chair of Gramercy Fund Management. He is author of “The Only Game in Town.”