A recent analysis by Pfister and Liebke, as reported by Commerzbank, examines 30 years of FOMC meetings to distinguish the effects of interest rate surprises and forward guidance shocks on the US Dollar and G10 currencies [1]. The study finds that forward guidance surprises account for a significantly larger share of USD variance, particularly during policy shocks, where they explain roughly 21% of the USD variance on the respective day [1].
The impact of forward guidance has varied under different Federal Reserve chairs. During the latter part of Alan Greenspan’s tenure and under Ben Bernanke, interest rate and forward guidance surprises explained only a small proportion of USD variance on meeting days [1]. Under Janet Yellen, this figure more than doubled, with both components accounting for almost 39% of the daily variance [1]. However, under Jerome Powell, the explained variance from these factors collapsed, making both insignificant, despite forward guidance becoming more prominent during his tenure [1].
The report notes that in recent years, the trend of shifting information from the FOMC statement to other meeting components has intensified. For the last 21 meetings since early 2024 (two under Warsh and 19 under Powell), the daily change in OIS on the day of the meeting has accounted for around 62% of USD variance [1]. Warsh, who has chaired only two meetings so far, is noted for his opposition to forward guidance, as evidenced by his recent abstention from voting on the dot plots, which display individual FOMC members' interest rate forecasts [1].
The analysis suggests that the evolving communication strategy of the Federal Reserve has altered the market's response to forward guidance and interest rate surprises, with the most recent meetings showing a greater influence from OIS changes rather than traditional guidance or rate surprises [1].
CONCLUSION
The Commerzbank analysis underscores a significant shift in how Federal Reserve communication impacts the US Dollar, with forward guidance playing a variable role depending on the chair. Recent meetings indicate that market reactions are now more closely tied to OIS changes than to explicit forward guidance or rate surprises. This evolution in Fed communication strategy may continue to influence currency volatility and market expectations.