Federal Reserve: Forward guidance impact – Commerzbank

Pfister and Liebke analyse 30 years of FOMC meetings to separate interest rate surprises from forward guidance shocks and their effect on the US Dollar and G10 currencies. They find guidance surprises explain a much larger share of USD variance, especially in policy shocks, and show how this relationship evolved under Greenspan, Bernanke, Yellen and Powell.

Guidance versus rate surprises

"Forward guidance does not always have the same effect. Breaking down the FOMC surprises into policy shocks (where equities and interest rates move in opposite directions) and information shocks (where both move in the same direction), as Jarociński and Kaladi (2020) do, shows that the forward guidance factor is only highly significant in the case of policy shocks, explaining roughly 21% of the USD variance on the respective day."

"By contrast, the trend under Powell’s predecessors follows a clear pattern: during the latter part of Alan Greenspan’s tenure and under Ben Bernanke’s chairmanship, our breakdown of interest rate and forward guidance surprises accounted for only a small proportion of USD variance on meeting days. Under Janet Yellen, however, this figure more than doubled, with the two components accounting for almost 39% of the daily variance."

"Under Jerome Powell, the explained variance of our decomposition collapsed completely, rendering both factors insignificant. At first, this seems confusing; after all, forward guidance became even more important under Powell than under his predecessors. But the answer is quite simple."

"The trend of shifting information from the statement to other components of the FOMC meeting has intensified in recent years. For the last 21 meetings since early 2024 (two under Warsh and 19 under Powell), the daily change in OIS on the day of the meeting has accounted for around 62% of USD variance."

"Warsh has only chaired two meetings so far, which is not enough to accurately assess his impact. But our analysis of the past 30 years or so, combined with his stated opposition to forward guidance - for example, he recently abstained from voting on the dot plots, which show the individual FOMC members' interest rate forecasts - suggests two possibilities:"

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)