A trio of economists figures it has mathematically proved something the financial world knows intuitively: What U.S. Federal Reserve Board chairman Alan Greenspan says has more impact on markets than what he actually does with interest rates.
Writing in the first issue of a new publication called The International Journal of Central Banking, the economists say their research has shown that statements the Fed releases at the time of rate-setting decisions by the Federal Open Market Committee (FOMC) "accounted for more than three-fourths of the explainable variation in the movements of five- and 10-year Treasury yields around FOMC meetings."
Among the examples they cite was a statement by the Fed at its policy meeting of Jan. 28, 2004, when it left the current federal funds rate unchanged.
The statement, they say, "led to one of the largest reactions in the Treasury market on record, with two- and five-year yields jumping 20 and 25 basis points, respectively, in the half-hour surrounding the announcement." (A basis point is 1/100th of a percentage point.)
The market had completely anticipated the decision not to change rates. What instead set it off, the economists say, was that in its statement, the FOMC dropped the phrase "policy accommodation can be maintained for a considerable period," replacing it with "the committee believes it can be patient in removing its policy accommodation."
This was read by financial markets as indicating the Fed would begin tightening policy -- raising interest rates -- sooner than previously expected.
The economists are Refet Gürkaynak of Bilkent University in Ankara, Brian Sack of Macroeconomic Advisers LLC of Washington, and Eric Swanson of the Fed's division of monetary affairs.
The new journal, to be published quarterly, is sponsored by 23 central banks, including the Bank of Canada, along with the Swiss-based Bank of International Settlements, which is hosting a website for the publication: http://www.ijcb.org.