WASHINGTON- 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 US 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.
Markets, in turn, may have noticed. The authors of the research – YuriyGorodnichenko 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 Institution survey published earlier this year felt the Fed is doing a better job overall of explaining itself.
