By Michael S. Derby
NEW YORK (Reuters) – Last year, inflation data that forced the Federal Reserve to embark on a historically aggressive path of rate hikes was a bigger market mover than any central bank action or commentary from a core policymaker, a new report of Evercore said IS.
“Fed speak in 2022 is actually best described as inflation with the [consumer price index] In-year releases provide by far the largest absolute change in two-year Treasury yields compared to any other type of policy event they studied for last year, Peter Williams, Krishna Guha and Gang Lyu wrote in a research publication on Sunday.
For example, they found that last year’s average CPI spending had twice the average impact on the short-term treasury compared to the Federal Open Market Committee’s average statement.
In terms of market movements, “the massive volatility surrounding each CPI release is remarkable” and reflects the magnitude of last year’s inflation surprises and how those unexpected readings changed the outlook for Fed policy, they wrote.
Last year was the year the Fed was kicked flat by the highest inflation in 40 years. Central bankers had initially brushed off the wave of price pressures as a temporary factor related to the onset of the coronavirus pandemic, but eventually got behind the curve. They then embarked on a very aggressive campaign of rate hikes that lifted the central bank’s interest rate target from near zero in March to between 4.25% and 4.5% by the end of 2022. Rates will almost certainly rise further this year, even if inflationary pressures rise. show the first signs of cooling.
In the report, the authors found that the FOMC’s statements and the press conferences that followed the meetings affected short-term government bonds and the stock market in different ways. The statement announcing the Fed’s policy actions hit bonds hardest, while the press conference, which is for the Fed chief to explain more fully what the central bank has been doing, had a greater impact on the shift in interest rates. S&P 500.
Meanwhile, Fed meeting minutes, which detail the conduct of FOMC meetings and come three weeks after each meeting, also had a market impact and were often received as more lenient compared to FOMC meetings and press conferences.
“We suspect this is because nuance, and the wider range of predictions and opinions that the minutes allow, tended to allow for more moderate interpretations than the more narrow and focused perspective of the statement and press conference,” the report said.
Among policymakers, the report found that comments by Fed Chairman Jerome Powell, Vice Chairman Lael Brainard and New York Fed Chairman John Williams had notable market effects. Christopher Waller, the former research director of the St. Louis Fed who became Fed Governor in late 2020 and has been a very vocal proponent of aggressive rate hikes, was also a market mover.
The report did not rank the market impact of the 11 remaining regional Fed leaders, who speak much more often than board members and even the New York Fed leader. Regional Fed leaders often hold a wider variety of positions on economic and monetary policy issues, and some central bank observers have lamented that the frequency of their comments obscures the message central Fed officials are trying to convey.
The Evercore ISI economists think market factors will shift in the new year.
“With inflation peaking and Fed Funds rates now turning restrictive, markets’ perceptions around policy volatility and the marginal impact of new data releases appear likely to be declining or at least refocused more towards growth concerns and away from inflation they wrote.
(Reporting by Michael S. Derby; editing by Andrea Ricci)