Forward Guidance: A Shift in How the Federal Reserve Communicates

A new analysis by Commerzbank examines the impact of forward guidance on US dollar variance over the past 30 years. The researchers break down FOMC meetings into policy shocks and information shocks, finding that forward guidance is only highly significant in policy shocks, explaining roughly 21% of USD variance.

The trend under previous Federal Reserve chairmen shows a clear pattern: during Alan Greenspan's tenure and under Ben Bernanke's chairmanship, the breakdown of interest rate and forward guidance surprises accounted for only a small proportion of USD variance. However, under Janet Yellen, this figure more than doubled to almost 39%.

Under Jerome Powell, the explained variance collapsed completely, rendering both factors insignificant. This may seem counterintuitive given that forward guidance became even more important under Powell than his predecessors. The answer lies in a shift of information from the statement to other components of the FOMC meeting, which has intensified in recent years.