The report says that inflation data in 2022 outperformed the Fed’s comments to move the markets

Written by Michael S Derby

NEW YORK (Reuters) – Last year, inflation data that forced the Federal Reserve to embark on an aggressive historic path of higher interest rates was a bigger driver for markets than any central bank action or comment from a primary policymaker, a new report from Evercore finds. Isi said.

“The Fed’s talk in 2022 can best be described as the inflation it is talking to [consumer price index] Releases throughout the year drive by far the largest absolute change “in two-year Treasury yields than any other type of policy event they studied last year,” Peter Williams, Krishna Guha and Zhang Liu wrote in a research release on Sunday.

It found that the average CPI release last year had twice the average impact on short-term Treasury notes than the average Federal Open Market Committee statement, for example.

In terms of market movements, they write that the “huge volatility around 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.

Last year was the year the Fed was stuck with the highest levels of inflation in 40 years. Central bankers initially brushed off increasing price pressures as a temporary factor associated with the onset of the coronavirus pandemic, but eventually found themselves behind the curve. Then they embarked on a very aggressive campaign of rate increases that raised the central bank’s rate target from near zero levels in March to between 4.25% and 4.5% by the end of 2022. Prices will almost certainly rise further this year even as inflation pressures show some Initial signs of cooling.

In the report, the authors found that FOMC statements and post-meeting press conferences affected short-term Treasurys and the stock market in different ways. The statement announcing the Fed’s policy actions had more impact on bonds, while the press conference, which is for the Fed leader to fully explain what the central bank did, had more impact on moving the S&P 500.

Meanwhile, the Fed’s minutes, which describe the facts of FOMC meetings and come up three weeks after each meeting, have also had an impact on the market, often being received as more pessimistic compared to the FOMC meetings and press conference. .

“We suspect that this is because the nuance, and the greater range of projections and opinions allowed by the minutes, tends to allow for more pessimistic interpretations than the limited and focused perspective of the statement and press conference,” the report said.

Among policymakers, the report found that statements by Federal Reserve Chairman Jerome Powell, Vice Chair Lyle Brainard and New York Fed leader John Williams had notable impacts on the market. Christopher Waller, a former research director at the Federal Reserve Bank of St. Louis who became a Fed governor in late 2020 and who has been a staunch proponent of a sharp rise in interest rates, has also been a market mover.

The report did not rank the market impact of the 11 remaining regional Fed leaders, who speak at a much greater frequency than board members and even the New York Fed leader. Regional Fed leaders often display a broader range of views on economic and monetary policy issues, and some central bank watchers have lamented the repetition of their comments as they blur the core message Fed officials are trying to advance.

Economists at Evercore ISI believe market engines will turn in the new year.

“With inflation peaking and the fed funds rate now entering constrained territory, markets’ perceptions of policy volatility and the marginal impact of new data releases appear likely to moderate or at least redirect more towards growth concerns and away from inflation,” they wrote.

(Reporting by Michael S Derby; Editing by Andrea Ricci)

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