Fed Chair’s Testimony to Congress: Did the Market Play Favorites?

Stock investors loved Alan Greenspan since the policies he pursued during his tenure as Federal Reserve Chairman benefited the stock market. At least that was the common opinion.

But did markets reflect this narrative on the times Greenspan testified before Congress? Did they have an inclination to have a rise, as we’d expect, or did their performance contradict the narrative? And how did the markets react to the statement from Jerome Powell and other Fed chairs? What does their behavior reveal about how they viewed each Fed chair?

To answer these questions, we used market and asset class data from the S&P 500 and MSCI for all dates the last five Fed chairs have testified before Congress, and the outcomes with each day by day average returns and average returns Return volatility compared.

To higher isolate market sentiment surrounding each Fed chair, we didn’t include the times of Fed rate of interest announcements in our evaluation. The Fed had already communicated its rate decisions to the general public before each Fed chair appeared in Congress, and the market had presumably taken the choice – to boost, maintain or lower rates – under consideration.

So how did the markets react to every Fed chair’s statements? Were there any special features or surprises?

As it turned out, Janet Yellen had probably the most positive returns in comparison with the 4 other Fed chairs on the times she testified. On average, the S&P 500 rose 0.20% when Yellen spoke and only 0.08% when Greenspan testified.

At the opposite end of the spectrum, days when Ben Bernanke or Powell testified are related to more negative stock market performance. The S&P 500 returned a mean of -0.05% on days when Powell or Bernanke appeared before Congress. Of course, Bernanke led the Fed through the Global Financial Crisis (GFC) and Powell during a period of resurgent inflation. So the pessimistic sentiment they created might not be particularly surprising.

Fed Chairman Testimony to Congress Average Return: One-Day Window (%)

We see similar leads to small-cap and international stocks, in addition to value and growth, with Yellen’s days producing higher returns than Greenspan’s. We repeated our tests over a three-day period through the Fed chairs’ congressional testimony and again found qualitatively similar results.

However, Bonds told a really different story. While stocks outperformed when Yellen testified, fixed income moved in the other way, with the general bond index returning -0.05% on the times Yellen appeared before Congress.

Volatility was one other data point we examined, with the Bernanke testimony days showing probably the most volatility overall.

Standard deviation of returns around Fed Chairman testimony days

Of all Fed chairs over the past 50 years, Yellen elicited probably the most positive stock market response and the least volatility, although bond investors tended to react negatively to her statement.

Otherwise, the Powell and Paul Volcker administrations saw a series of rate of interest hikes in response to rising inflation. The stocks’ weaker performance on their test days may very well be because of markets associating each with higher rates of interest.

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Image courtesy of US Federal Reserve