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Sunday, January 08, 2006

Do I Make Myself Perfectly Clear?

Not exactly - according to this research, we get the direction of interest rate changes wrong more often than not after Fed speeches:

Fed Speeches Send Investors Wrong Way, Reinhart Says, Bloomberg: ...Interest rates after a Fed speech tend to move in the opposite direction from where they are eventually headed, according to research by Vincent Reinhart, director of the Fed's monetary affairs division, and Brian Sack, a former Fed economist who is now a private forecaster. ... Speeches by individual members of the Fed's policy-setting Open Market Committee cumulatively pushed down the yield on the two-year Treasury note during the first half of 2005, while the committee's official statements lifted it, the authors said ...

''Speeches are the least accurate form of communication,'' wrote Reinhart and Sack .... ''On average, the initial market reaction to speeches reversed over subsequent weeks.'' The paper's sample included 1,042 speeches since November 2001. That includes interviews by Fed members, which were classified in the same category. The Fed communicates with the public in four ways: FOMC statements ... released after each interest-rate meeting; minutes of those meetings, released three weeks later; semi- annual testimony to Congress on monetary policy; and speeches by individual committee members, of which there are about 250 a year.

''Statements were quite successful at pushing the yield in the appropriate direction, while speeches appear to have given the market a head fake'' the authors wrote. Congressional testimonies had the ''most accurate'' effects, ahead of statements, the research showed. Minutes of meetings were third. ...

The financial market reaction to Fed speeches, while often wrong, was the smallest of the four methods of communication studied by the authors. Testimonies produced the biggest moves, followed by statements and minutes. Speeches may have a small effect because ''the market realizes that the communications by any individual Committee member are a less accurate predictor of the Committee's actions than communications that have been sanctioned by the Committee as a whole,'' Reinhart and Sack wrote.

Fed Chairman Alan Greenspan's speeches moved the two-year Treasury yield more than 3 basis points, ''well above the effect attributable to other FOMC members,'' according to the research...

    Posted by on Sunday, January 8, 2006 at 01:08 AM in Economics, Fed Speeches, Monetary Policy | Permalink  TrackBack (0)  Comments (9)

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