The next Federal Reserve meeting is scheduled for the end of this month, but not many of us are waiting with bated breath for what’s going to happen. Interest rates are expected to go up yet again, which will undoubtedly signal additional challenges for the commercial real estate sector as borrowing gets more expensive. But no matter how many times Jerome Powell, Chairman of the Fed, says that the central bank is aiming to fight inflation with continued hikes throughout 2023, the market doesn’t seem to believe him.
Market analysts at HSBC predict that this will be the final hike with a basis point increase of about 50 points. Powell, on the other hand, is trying to push a narrative that the Fed will present several more rate hikes this year in an effort to slow the economy down, lessen the demand for labor, and ward off a devastating recession by inducing a more manageable one. In order for the Fed to be effective, it needs the markets (meaning the public) to listen to what it says and act accordingly. But data from the Federal Reserve Bank of Chicago points out that market conditions have loosened, giving investors confidence that a recovering market is a stronger signal than whatever Powell has to say.
Failure to convince markets to take their economic prognosis seriously will result in the Fed inflicting greater pain with more blistering hikes over a longer period of time, but part of the reason that investors aren’t accepting the Fed’s messaging isn’t because of what Powell is saying, but how he says it. Powell has made it clear that hikes will let up when progress on inflation is visible. “The largest amount of pain would come from a failure to raise rates high enough and allowing inflation to become a trench in the economy,” was a statement he gave at a mid-December press conference. It’s a straightforward statement, as black-and-white as ink on paper, but watching Powell deliver it through a succession of rapid blinks and a subtle back-and-forth shift tells a different story.
Powell is acutely aware of the power of communication. Despite the fact that he holds a bachelor’s degree from Princeton University and a Juris Doctor from Georgetown, his speeches are often intended to be understood at a high school reading level. In fact, the transcript of his December 14th conference clocked in a readability level fit for ninth and tenth graders. That’s because Powell campaigned on a plain-English initiative to make the Fed’s messaging more accessible to millions of Americans. He believed in the initiative enough to increase the amount of press conferences where he would be addressing the public. But Powell may not have realized how much his delivery could undermine his messaging that the economy hinges on.
Words have power, but so does tone, and markets have noticed. Researchers who collaborated on a working paper for the National Bureau of Economic Research discovered that the Fed chair’s emotional tone during press conferences affects stock prices regardless of the words uttered. “The variation in voice tone has economically significant effects,” says the report, “non-verbal communication can have a statistically and economically discernible effect on a variety of financial indicators.”
Using language processing, the researchers determined that of the last three Fed Chairs, Powell was the one who appeared to have the most pessimistic tone. Now, since Powell is gunning for more stringent financial conditions, his subdued despondency could play in his favor according to the report’s analysis, but his body language seems to have given market analysts the idea that his forecasts are a bit of a glum exaggeration, which can persuade investors that Powell doesn’t exactly mean what he says.
The report adds that the Fed Chair can benefit from “a certain level of acting skill,” in order to ensure the markets get the message loud and clear. Although Powell never signed up to become a thespian, the Fed has become increasingly reliant on front-facing communication for its messaging. Powell’s position is already extremely demanding, but he may want to consider dabbling in the Alexander Technique in order to get his body language under control. Powell’s body language plays a massive role in how convincing his messaging appears, more so than his tone and even more than his verbiage.
Albert Mehrabian, a professor of psychology at the University of California, Los Angeles, famously developed a ratio of verbal and non-verbal cues for effective face-to-face communication. Mehrabian proposed the 7-55-38 rule of communication, and according to the rule, words, no matter how plain-spoken they may be, only communicate a measly 7 percent of a message. Body language (including gestures and facial expressions) accounts for 55 percent, and tone 38 percent. Powell’s habit of stern words paired with slight shrugs seems to have had a similar effect of an eye-roll to onlookers, because investors have just gotten into the habit of not buying what he’s selling.
The impact is more intense than you may think, because how policy messages are communicated can move the stock market. The report found that the impact of switching the Chair’s tone from a negative one to a positive one could raise S&P returns by as much as 200 basis points. Though commercial real estate is not tied to the S&P, the impact a sour tone has on stock prices is big enough to have a spillover effect. It is clear that stock market fluctuations, whether favorable or negative, have some impact on how the real estate market functions. Three crucial elements of the property market are how buyers perceive the market, how banks act, and how lenders plan for the long-term. When the stock market undergoes a significant swing in one direction or the other, these adjustments are noticeable. REITs are particularly vulnerable to the stock market’s sway, as money flows faster when markets are expected to run smoothly. And if investors see enough nonverbal cues to dismiss Powell’s austere word choice, that may be good news for REITs in the short-term but disastrous in the long-term.
Real uncertainty exists, but Powell’s communication style seems to have led many to believe that the Fed is just providing forward advice rather than making a strong commitment to maintain rates higher for a longer period of time. Top central bankers’ words frequently cause market reactions, therefore language is a crucial element for effective monetary policy. Officials have the power to influence behavior and contribute to the effectiveness of their programs through influencing public perceptions about the economic outlook and expected central bank actions. For the next meeting, it’s not just going to be what Powell says, but how he says it.