While rate-setting decisions are set out in statements from the U.S. Federal Open Markets Committee (FOMC), it’s the press conferences that often have the biggest market impact, according to a new paper from the U.S. Federal Reserve Board.
In the working paper, Fed staff examine the market reaction to various types of communication from the central bank — including FOMC statements, speeches, press conferences, and Congressional testimony — finding that press conferences have the strongest correlation with future monetary policy and prompt shifts in market expectations.
“While FOMC statements coarsely signal the current stance of policy, press conferences fine-tune the message, which helps market participants revise their expectations about future policy,” the paper noted. Indeed, the market reaction to a press conference can run in the opposite direction to an FOMC statement, even when the content of both is similar.
“We explain reversals in the market reaction to the press conference via content that is absent from the statement and correlates more strongly with the future policy rate — a finding we are the first to document, to our knowledge,” it said.
The nuance that’s communicated in a press conference versus a formal statement is the key to their market moving power, the paper suggests.
“The variation in content of the press conference — some dovish content even though it is hawkish on net, and vice versa — is the source of predictive correlations with the future federal funds rate and helps account for market reversals,” it said.
Combining large language models and asset price data, the researchers conclude that “press conferences stand out for their intensity of sentiment and market reactions.”
Fed speeches, on the other hand, do not demonstrate a strong relationship with market reactions, it noted.
“We interpret this as speeches having a noisier signal relative to what we observe from press conferences,” the paper said.