Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

What, me worry? Fed chief's emotional tone can drive markets, study suggests

EconomyJul 21, 2021 16:48
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters. FILE PHOTO: U.S. Federal Reserve Chair Jerome Powell and former Fed Chair Janet Yellen look on as former Fed Chairman Ben Bernanke speaks at the American Economic Association/Allied Social Science Association (ASSA) 2019 meeting in Atlanta, Georgia, U.S.,

By Howard Schneider

WASHINGTON (Reuters) - Jerome Powell took over as head of the Federal Reserve in 2018 pledging a plain-spoken, language-of-the-people approach to talking about monetary policy.

It turns out that's a bit of a downer: New research using artificial intelligence and voice analytics rates Powell as the most negative of the last three chairs of the U.S. central bank, with his predecessor Janet Yellen the best able to maintain a neutral tone at her news conferences and Ben Bernanke before that a comparative cheerleader.

Fed emotions https://graphics.reuters.com/USA-FED/SPEAK/oakvedrbdpr/

Markets, in turn, may have noticed. The authors of the research - Yuriy Gorodnichenko of the University of California, Berkeley, and United Kingdom researchers Tho Pham and Oleksandr Talavera - found that the Fed chair's emotional tone at news conferences influences stock prices independent of the meaning of the words used.

The effect, as much as 200 basis points on the S&P 500 index for a shift from a positive to a negative tone at a Fed chief's news conference, was comparable to that created when Fed chairs were actually trying to shape expectations with their language.

"It appears that a certain level of acting skill may be helpful to ensure that the public receives the policy message fully and correctly," the authors wrote in a working paper published this month by the National Bureau of Economic Research (NBER).

Bond markets, perhaps more engrossed in the technical analysis of policy, were not as smitten by the chair's tonality; inflation expectations reflected by bond yields and currency rates moved more modestly.

The scrutiny of a Fed chief's emotive capacity to influence markets comes as Powell is effectively in the middle of a months-long audition for reappointment. His term as chair expires in early 2022.

So far, the Biden administration's views of his performance managing the coronavirus crisis have been generally positive, administration officials have told Reuters, and economists expect him to be renominated.

Even if Powell's tone strikes a robot listener as negative, market participants generally approve of his communications style, and according to a Brookings https://www.brookings.edu/research/survey-of-academic-and-market-observers-gives-high-marks-to-fed-communications Institution survey published earlier this year felt the Fed is doing a better job overall of explaining itself.

Wall Street marks up Powell Fed https://graphics.reuters.com/USA-FED/COMMUNICATIONS/jbyvrznqnve/chart.png

ALL ABOUT THE TONE?

Markets often react to the statements of top central bankers, and language is an important tool in successful monetary policy. By shaping public views about the economic outlook and likely central bank actions, officials can influence behavior and help make their policies effective.

Bernanke, who led the Fed from 2006 to 2014, began holding quarterly news conferences in 2011 after policy meetings to break the "mystique" of secrecy around central banking, and give communications a bigger role. Powell, who took the reins of the central bank in 2018, upped that to eight times a year, with a news conference scheduled after every Fed policy meeting.

"Fedspeak" isn't without risk. All three of the last Fed chiefs made notable, market-disrupting missteps in either a news conference, congressional hearing or media interview.

While formal content analysis of Fed policy documents and speech transcripts is becoming more common, the authors of the study published by the NBER said it was the first time modern analytic tools had been used to estimate the market impact of a Fed chair's emotional tone separate from the meaning of the words uttered or any policy action taken.

The study used machine learning techniques and databases of voice recordings to assign one of five emotions - happy, pleasantly surprised, neutral, sad and angry - to the responses Bernanke, Yellen and Powell gave to 692 questions asked at 36 news conferences from April of 2011 through July of 2019. That informed a separate analysis of market outcomes around each meeting.

The period predated the coronavirus pandemic, when words like "heartbroken" - a common one for Powell the last year - extended the range of emotions Fed chairs brought through the door.

The authors argue that if anything their findings make a hard job more challenging.

"How messages are said appears to be potentially as important as what is in the messages," they wrote, arguing it "possibly adds another qualification (voice control) to the job requirement."

What, me worry? Fed chief's emotional tone can drive markets, study suggests
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email