Bernanke towers as biggest Fed market mover: study

By Alister Bull Tue Jul 22, 11:00 AM ET

WASHINGTON (Reuters) - The financial market impact of Federal Reserve Chairman Ben Bernanke's remarks has soared since the start of 2007 as he telegraphed crucial shifts in monetary policy, a report on Tuesday showed.

Only second in command Donald Kohn came close, possibly in a deliberate bid by the pair to exert leadership during the country's subprime mortgage crisis, according to a regular "Who Moved Markets" review by Macroeconomic Advisers, an independent economic forecasting company headquartered in St. Louis.

"Bernanke's speeches accounted for over 60 basis points of movements in the two-year Treasury note, which is five times the effect of the next most influential FOMC (Federal Open Market Committee) member," Macroeconomic Advisers said, referring to the Fed's interest-rate setting committee.

They measured the impact of each Fed policy-maker's speech on the two-year Treasury note, starting 15 minutes before the speech and for 1 hour and 45 minutes afterward, to capture how much it moved the yield in either direction.

The survey also monitors the impact of Fed testimonies to Congress, policy statements accompanying interest rate decisions, and the minutes of FOMC meetings which are released with a three week lag after the statement.

The Fed has slashed interest rates 3.25 percentage points since mid-September to 2 percent to shield the economy from a credit crunch sparked by subprime mortgage market losses.

The scale of Bernanke's dominance has skyrocketed compared with 2006, when he was only twice as influential as the next most market-moving member of the FOMC, while Kohn has emerged from almost last place that year.

"It may be that these two heavyweights made a conscious effort to be the ones delivering important changes to the policy message," Macroeconomic Advisers said.

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Financial markets have been whipsawed by thumping losses on mortgage backed securities and policy-makers have strained to communicate the balance of risks between growth and inflation.

One particularly noteworthy speech was delivered by Kohn on November 28 to the Council of Foreign Relations in New York.

It plainly hinted at more rate cuts to come by emphasizing the need for flexibility in the face of uncertainty, and was striking because it appeared to contradict previous comments by other Fed policy-makers, while shifting the tone from the neutral balance adopted by the Fed in its October statement.

Kohn's speech came 12 days after Fed Board Governor Randall Kroszner had emphatically said that the current stance of policy would get the economy through its rough patch; a message that distressed markets had found very hard to swallow.

Bernanke, speaking a few weeks after Kohn's New York performance, gave markets an even more directional push when he starkly warned on January 10 that the Fed stood ready to take "substantive additional action" to support growth.

On January 21 the Fed made an emergency 75 basis point inter-meeting rate cut. It went on to lower rates by a cumulative 125 basis points at the following two scheduled FOMC meetings as it tried to buffer growth while helping JP Morgan rescue stricken investment bank Bear Stearns.

The next four spots in the who moved markets league table are almost a draw.

The ranking splits neatly between two hawks, who favor higher interest rates to combat inflation; Richmond Fed President Jeffrey Lacker in third place and Philadelphia Fed chief Charles Plosser in fourth, with Board Governor Frederic Mishkin and Boston Fed President Eric Rosengren -- doves who see the housing crisis as more pressing than inflation -- in fifth and sixth position.

Anti-inflation hawks are identified by Macroeconomic Advisers as Fed policy-makers whose speeches and remarks pushed Treasury note yields up by the most. The impact of the more pro-growth doves helped yields to go lower.

Plosser dissented twice this year during votes on the FOMC against more rate cuts while Mishkin argued for aggressive rate cuts to short-circuit a so-called negative feedback loop from distressed financial markets to the real economy. He steps down at the end of August to return to teaching.

Plosser, on Tuesday, told a regional group of businessmen that rising inflation could force the Federal Reserve to start raising interest rates even before labor and financial markets recover.

He said that keeping monetary policy too loose for too long could worsen the inflation problem by allowing expectations for ever higher prices to become built into consumer and business psychology.

"To keep inflation expectations anchored means that monetary policymakers will have to back up their words with actions....We will need to reverse course. I anticipate the reversal will need to be started sooner rather than later."

The survey marked two other regional Fed chiefs as hawks: Richard Fisher of the Dallas Fed, who has dissented at every meeting this year in favor either of halting rate cuts or for an interest rate hike, and Minneapolis Fed chief Gary Stern.

Among other doves, Macroeconomic Advisers named Atlanta Fed President Dennis Lockhart and San Francisco's Janet Yellen.

(Editing by Theodore d'Afflisio)