When it comes to central bankers and economic leaders, a new study backs up the old adage: It’s not what you say, but how you say it.
And a positive tone from economists can boost markets, no matter the data.
Using sophisticated computer algorithms, researchers from the University of Birmingham and others analysed the tone of voice used by US Fed chairs during the press conference that follow their rate-setting committeess and examined the impact on financial markets.
They discovered a more positive voice tone leads to a rise in share prices.
The researchers found market momentum builds and after five days, the return on the SPDR S&P 500 Trust – a popular fund comprising of 500 blue-chip American stocks – shows a solid increase before levelling out.
Market volatility, both current and anticipated, was soothed by the dulcet tones of a positive speaker – consistent with the principle that central banks can shape uncertainty about future economic conditions.
An upbeat tone also reduced investors’ expectation about interest rate risk.
The market’s response to a unit decrease in voice tone matches the reaction observed after a one-standard-deviation forward-guidance shock, which generally prompts companies to increase their output, raise prices and invest in new capital.
When it comes to tone the university analysis found on average, Ben Bernanke had more positive emotions in his voice than Janet Yellen, who in turn had generally more positive emotions in her voice than Jerome Powell.
Sasha Talavera, professor in financial economics at the University of Birmingham, said: “Our study shows that it’s not just what central bankers say, but how they say it which matters. This reveals important policy implications and does not make the job of central bankers easier. It possibly adds another qualification of voice control for the highest level positions – to paraphrase Ronald Reagan, how can a Fed Chair not be an actor?
“Market participants tend to look for more information through ‘non-scripted’ aspects such as voice tone or body language of the Fed Chair. These non-verbal cues can signal the Fed’s perspective on economic outlook and the course of future monetary policy.”
The international research team from the Universities of Birmingham and Reading, alongside University of California, Berkeley have published their findings in the National Bureau of Economic Research.