These latest market gyrations following misinterpretations of Fed and ECB comments are now intensifying debate around the heft given to such semantical nuances - and whether speaking in code risks doing more harm than good to the world’s economies. He too came out later to say the word he had used wasn’t intended to be a policy signal. Bond yields soared in September after European Central Bank (ECB) President Mario Draghi talked about a “vigorous” inflation rise.
The Fed is not alone in giving hypersensitive markets a bum steer in recent weeks. Much like ancient Greek oracles, policymakers can convey volumes with one word - even without saying it.Ĭentral bankers have long watched their language but with asset buying programs tailing off and rock-bottom rates, they have recognized that giving markets the right signals about future policy - known as forward guidance - has never been more important. Welcome to the world of central bank communication. When he went on to say rates were a long way from neutral, bond yields surged to seven-year highs. The omission of a word that had featured in Fed statements for years sent bond yields lower as investors interpreted it as a signal the Fed’s policy stance was no longer accommodative - so rates might not go up again, for a while at least.īut a week later, Fed Chairman Jerome Powell quashed the speculation saying omitting “accommodative” just meant policy was proceeding in line with its expectations. FILE PHOTO: The Federal Reserve building is pictured in Washington, DC, U.S., August 22, 2018.
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