The Fed’s Next Move Might Be Almost Certain—But Here’s How the Post-Meeting Comments Can Move Markets

If Federal Reserve Chair Jerome Powell says anything unexpected at Wednesday’s press conference, you’ll likely see it reflected in prices for your financial assets, especially in bonds tied to inflation expectations.

That’s one of the conclusions of a paper by researchers at the Federal Reserve Bank of San Francisco who studied what happens when officials at the Federal Reserve say something surprising in their official policy statements, or in the Fed chair’s traditional post-meeting press conference.

“Monetary policy news from press conferences—whether in isolation or in conjunction with the news in the associated statement—is a particularly important source of information, with strong effects on Treasury yields and prices of risk assets,” researchers at the bank led by Miguel Acosta, a professor of economics at the University of Wisconsin, Madison, wrote in the paper, published last month.

The paper tracked policy surprises around the Fed’s policy meetings, when the central bank announces changes to the fed funds rate to pursue its dual goals of keeping inflation low and employment high.

The research showed that the post-announcement press conference is the most influential source of surprises, far more so than the policy statement released alongside the decision or the minutes of the Fed’s policy committee meetings, which are released weeks after the fact.

Those press conferences are important to financial markets because they inform the public about how Fed leaders are likely to move monetary policy in the future.

The fact that financial markets respond to the surprises in the words of the Federal Reserve’s interest rate policy announcements is not, itself, surprising—what’s new is how the researchers quantified those surprises and tracked them over time.

To write the paper, the team created and made available to the public a Monetary Policy Event Study Database, which tracks how financial markets respond to various forms of “Fedspeak.” The researchers tracked how prices responded, including for treasury bonds whose yields reflect investor expectations for future inflation.

Conventional wisdom goes that if the Fed zigs when markets expect it to zag, prices for all kinds of financial assets will change. When that surprise is in a “hawkish” direction—that is, when the Fed indicates it’s going to be more likely to keep its key interest rate higher in the future—expectations about future inflation fall and stock prices go down.

Investors generally assume that a higher fed funds rate will lead to higher borrowing costs, which will drag on businesses’ profits and subdue inflation. The opposite happens with a “dovish” surprise, indicating rates will be lower than previously expected.

Fed officials are widely expected to keep the fed funds rate flat at the next meeting of the Federal Open Market Committee on Wednesday. On Monday, traders were pricing in less than a 3% chance the Fed would make a surprise cut to the fed funds rate. If there’s a surprise about the future path of interest rates, it’s likely to come around 2:30 p.m. Eastern Time, when Powell takes questions from reporters.

“Press conferences convey important and independent monetary news relative to the more traditional statements, suggesting that disregarding information in the press conferences risks overlooking an important source of information,” the researchers wrote.