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Sometimes the reasons are simply hiding in plain sight

Why Did Long Rates Go Up During the Fed Press Conference?

The chart below looks at what Fed Chair Kevin Warsh said during the press conference minute-by-minute:

1. There was no specific moment during the press conference where long rates jumped higher.
2. There were several instances when Warsh said something hawkish where rates began to go down.
3. Rates went up more after the press conference was over than during the press conference.
This pattern reveals something important about what’s driving the market reaction to Fedspeak, including the steepening of the yield curve.
One interpretation of what happened is that markets understand the Fed’s commitment to 2% inflation, but with no forward guidance, the market does not understand how the Fed will get to 2% inflation.
Is the way to 2% inflation through higher rates, a smaller balance sheet or tighter financial conditions? The answer to this has significant implications for the yield curve and how and when we will achieve 2% inflation. The lack of clarity about how to get there is what’s pushing yields higher because there is now a risk that it may take longer or involve a policy mistake.
Imagine saying: “I will take you from New York to Los Angeles, but I’m not telling you how quickly, what it will cost or how you’ll get there.” By not explaining these important elements, you may question if we are actually getting to Los Angeles.
The risk with abandoning forward guidance is a steeper yield curve with investors asking more questions about the journey ahead, which is what we have seen since the statement came out.
The bottom line is that an important part of the Fed’s credibility is not just to say that it has certain goals but also to explain how it will achieve those goals.

Torsten Slok - Partner, Chief Economist, Apollo

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