The Fed has changed its tone significantly in recent months, softening slightly after a hike in December that helped fuel a market meltdown, then making a full dovish pivot over the following months as officials expressed concern about economic data.
Monday 22, April 2019
(Bloomberg) -- Goldman Sachs Group said that risky assets are reacting more strongly to hawkish monetary shocks from the Federal Reserve in recent years, owing to the Fed losing its forecasting edge.
Jan Hatzius and David Choi, Goldman economists, said that the Fed’s relative predictive advantage versus private economists has declined in recent years as the higher quality and quantity of forecasters makes it harder for anyone, including Fed staff, to beat the wisdom of the crowd.
They added that it also means that after hawkish monetary shocks, such as a surprise rate hike or indication of higher rates, markets tend to react more negatively and consensus growth forecasts now decline.
The duo found that information effects or reactions caused by the Fed likely having insight that others do not, have mostly gone away.
“The decline of information effects is perhaps one additional reason for why financial markets appear more reactive to Fed policy in recent periods,” the economists said. “Absent large information effects, the stock market should react more negatively to hawkish monetary shocks. We find strong evidence of this.”
In March, the central bank’s rate projections fuelled recession concerns and sent 10-year US Treasury yields lower, though, they’ve since recovered to nearly the level seen before that meeting.
The next rate move could be up or down, but there is likely to be a high bar to move either way.
“The key takeaway from recent Fed policy decisions is that monetary policy will be more dovish and supportive of growth, not that the Fed has implied something negative about the outlook that market participants currently do not know,” said the economists.