ATFX - Make the market "obedient"? The Federal Reserve is not as good as the European Central Bank!

atfxAn index tracking central bank communications shows that the European Central Bank has been more successful in moving markets in the desired direction, while Federal Reserve communications have often struggled to produce a consistent market alignment.

According to an index created by the European Central Bank to measure the tone of its communications,The ECB's press conferences have more control over financial marekts than the Fed.

The ability to guide investor expectations is a crucial policy tool for central banks, so the ECB's index tracking central bank communications could attract the attention of policymakers and market participants.

The results were announced in a blog post published on Wednesday by ECB staff. The article shows that, as measured by changes in the one-year overnight index swap rate,The ECB's press conference "has an impact on markets that goes beyond the direct impact of policy decisions"。

ECB staff said that "the central bank's remarks may affect the financial marekt and ultimately the development of the economy." The article found that most of the eight press conferences since the ECB began raising interest rates in July 2022 have pushed the market in the expected direction.

outside ATFXThe Fed's communication influence is different. The article notes, "In contrast, there was no consistent correlation between our measurement of changes in the Fed's policy tone and short-term interest rates at the Fed Chair's post-meeting press conference”。

The Fed declined to comment. But the ECB offered a possible explanation, saying markets could react to "other information not captured directly from the press conference", such as "dot plots" updated by Fed officials after the policy meeting.

ECB staff said its index also tracked the tone of central bankers' speeches, interviews and testimony before lawmakers to assess whether they were "hawks" or "doves".

The index also found that since the ECB began raising interest rates in July 2022, swap rates have twice moved in the opposite direction as suggested by the tone of its press conference. After the first rate hike in July 2022, swap rates rose despite the tone of the ECB's press conference being seen as "dovish". In February, its communication was considered tough, but swap rates fell.

In the latter case, the ECB blog post noted that the discrepancy could be explained by the Governing Council's policy statement noting that "risks to the outlook have also become more balanced" and that it would "assess the follow-through path of monetary policy" at its next policy meeting. "These statements may lead markets to expect a slower pace of rate hikes after March".

Overall, the ECB's index highlights the importance of the central bank's policy tone, not only in communicating factual information, but also in guiding the public's assessment of monetary policy.

In addition, the report said, "the Fed's communication tone was, on average, more hawkish than that of the ECB in 2021 and 2022. However, this difference has narrowed recently as the ECB's tone has also gradually become more hawkish."

The report found that differences in tone between the ECB and the Fed "help explain movements in the euro-dollar exchange rate" and that communication between policy meetings "also affects financial marekt".

The Federal Reserve started raising rates four months earlier than the European Central Bank, which has raised its deposit rate by 5.25 percentage points since March last year. While inflation remains above its 2 per cent target, investors are betting that both central banks are close to stopping.