Global Markets Daily Fed Communication and FX Volatility

Economics Research 11 August 2026 | 12:17AM BST

Global Markets Daily: Fed Communication and FX Volatility

n We examine the potential implications of less Fed forward guidance for FX Michael Cahill | volatility using historical evidence from the US and lessons from abroad. We are Goldman Sachs International able to leverage a set of historical US and international market events; some Lexi Kanter elements of Chairman Warsh’s preferred approach are similar to the Fed’s | pre-GFC communication style, and other central bank leadership transitions have Goldman Sachs & Co. LLC

also wrestled with a change in both communication style and data emphasis. n We begin by assessing how FX volatility has evolved with innovations in FOMC communications, similar to work done by our rates strategists. We find that, under Chair Powell, FX volatility shifted from the FOMC statement to the press conference. We also find that disagreement with the Committee—measured by so-called “hidden dissents”—were positively associated with increased volatility around subsequent data releases, although the relationship is weaker than in rates vol. n We next turn to potential lessons from abroad. In our view, the current situation most closely resembles the Bank of Canada’s transition following Governor Mark Carney, who pioneered the use of explicit forward guidance as he steered the BoC through the Financial Crisis. Following his departure, the next Governor dialed back guidance, changed the Bank’s preferred inflation measure and brought a different perspective to persistent inflation misses. We find some evidence that this led CAD vol to move higher than peers, and of “growing pains” as the market learned to adjust to the new approach. n Both in the US historically and in other similar cases abroad, central bank communication style can dictate FX volatility relative to other currencies, but macro factors are much more important for the overall level. Nevertheless, the data show that even small communication changes can have an impact on how FX volatility tends to respond to different events, at different horizons, and even to different data. Taken together, we expect less Fed forward guidance to translate to higher front-end vol, more focus on other Fed communications, and potentially more market misfires as investors learn a different data framework.

Fed Communication and FX Volatility

We examine the implications of less Fed forward guidance for FX volatility using evidence from the US and lessons from abroad. We are able to leverage a set of historical US and international market events; some elements of Chairman Warsh’s

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preferred approach are similar to the Fed’s pre-GFC communication style, and other central bank leadership transitions have also wrestled with a change in both communication style and data emphasis.

Looking Back: Lessons from Prior FOMC Communication Changes We begin by assessing how FX volatility has evolved alongside changes in FOMC communications, building on similar work by our rates strategists. We find that, under Chair Powell, FX volatility shifted from the FOMC statement to the press conference. Compared with the Bernanke and Yellen eras, post-FOMC press conferences under Powell generated higher intraday FX volatility (Exhibit 1), while the statement elicited a more muted market response (Exhibit 2). This is consistent with both our rates strategists’ findings and the broader academic literature, which attribute the recent increase in market volatility around press conferences partly to differences between Chair Powell’s communication style and that of his predecessors. However, macroeconomic conditions and the policy choices they presented—including parameters like new innovations in forward guidance and QE program details released in the FOMC statements—likely played an important role, in our view.

Exhibit 1: Compared with the Bernanke and Yellen eras, Exhibit 2: ...while the statement elicited a more muted…