How the Fed Communicates with the Markets
The Fed communicates in very specific ways to the markets. Because of its structure (seven governors and 12 regional Fed Presidents), the views of the different speakers often diverge on important issues. A good Fed chairman will use his power and influence to present a unified view of the Fed’s view of the current situation, but it is not uncommon that a specific Fed president (or less frequently, a governor) will present an alternate view, arguing that the interest rate policy is too tight or too loose. By understanding the different methods of Fed communication you can better understand what the Fed is saying and how to interpret a particular statement.
The primary communications are through:
- Official FOMC statements and minutes
- Official Speeches and Testimony
- Questions and Answer sessions (often following speeches and testimony)
Official FOMC statements and minutes: When the FOMC has a meeting a policy statement is published shortly after the meeting ends (see here for the calendar of recent FOMC meetings and the associated statements and minutes; this site is the place to find the FOMC statement as is it released). These statements are fairly formulaic: a policy statement, a brief description of the economy as the FOMC sees it and the voting results. Unlike the ECB there is no press conference after the FOMC meeting, so instead there is an active debate among so-called Fed watchers about what the Fed really meant to say, with careful analysis of changes in wording. Economic analysts (including this one) will debate why the FOMC left out a phrase it had used in the past or the precise significance of a dissenting vote.
Approximately two weeks before each FOMC meeting the Fed publishes the “Beige Book” (see 2008 schedule here), officially titled the”Summary of Commentary on Current Economic Conditions by Federal Reserve District.” This is a collection of anecdotal information on each of the twelve Federal Reserve Districts that are collected and presented by an individual regional Federal Reserve Bank. The unusual aspect of the Beige Book is that the tone of the presentation is often sharply influenced by the views of the regional Fed (or more specifically the President of the regional Fed) who is the author of the report; on some occasions the view of the economy can shift sharply from one month to the next more as a result of the difference in perspective of the author than in any change in the economy itself. A careful reader of the Beige Book will determine the author of the particular presentation to see if the summary is merely a restatement of the specific bank president’s well known view of the economy.
Official Speeches and Testimony: There is a modest difference between speeches (usually invited lectures by a Fed official to a group of financial executives, see here) and testimony before Congress (usually a presentation by the Chairman of the Fed that is covered on television, but also presentations by other officials, see here). In general the Fed official will have a prepared text that will be released at the official time on the Fed’s web site (see the links above) and then may answer questions.
Questions and Answers: The most notable Congressional testimony is the Monetary Report to Congress, where the Chairman of the Fed goes to Congress twice a year (usually January and July) and visits both the House and Senate for separate presentations. In a curious tradition, the Senators or Congressmen often speak first, then the Chairman presents the report, and then there is a several hour question and answer session. While the large majority of the so-called questions are actually speeches by members of Congress designed to attract attention to a specific issue and the member of Congress who asks the question and often of little general interest (but see some videos on youtube here), there is occasionally a question that prompts the Chairman to say something more clearly than he has in the past. So these sessions are televised to trading rooms across America, even though there is little news made at any given time.
Fed Chairman Bernanke speaks relatively more clearly than his predecessor, Chairman Greenspan. Mr. Greenspan enjoyed posing rhetorical questions and speaking in a confusing way; markets would often react strongly to his testimony, often changing directions several times before the Chairman’s statement was fully understood. Chairman Bernanke does not seem to move markets as much, partially as a result of his plain speaking. The Chairman of the Fed is an important force in the markets but does not have superhuman powers, and thoughtful investors will evaluate his statements (and his views on the economy and markets) as one source of information among many.