Economic Indicators Weekly

– You don’t need to run a trillion-dollar hedge fund to make the stock market move. If you’re the chair of the US Federal Reserve System, the central bank of the United States, the weight of your words can cause the stock market to move significantly. Just a hint of the potential to raise interest rates and be hawkish or leave interest rates low and be dovish, can be absolutely critical for the expected cost of money, corporate profits, and growth expectations. There are two main times when what the Fed chair says can impact markets the most: press conferences after Fed decisions about policy, and testimony before Congress.

Let’s talk about the Fed meeting press conferences. These take a standard structure. After a brief welcome, the Fed chair reads the Fed decision and then answers questions from the press and the audience. Bloomberg, The Wall Street Journal, CNBC, and many others are there, trying to put the Fed chair on the hot seat to reveal hints about future policy that are not written in the Fed statement. And some investors and analysts try to dissect each and every word the Fed chair says, as well as every word in the Fed statement These people are usually called Fed watchers, and the words that they watch the most for from the Fed are called Fed speak.

This is why the impact of these press conferences can be significant, especially if the Fed chair says too much. This has happened to more than one Fed chair in the past, by the way, and it moves markets. If the Fed chair hints at a timetable, even if it’s an off-the-cuff guesstimate, financial markets take it as law. The reason: The Fed makes monetary policy, policies that can impact interest rates and growth in the economy. The Fed has so much policy power, you’d be a fool not to believe.

Aside from press conferences, the Fed chair testifies before the House Financial Services Committee and the Senate Banking Committee, usually over a two-day period, twice per year. Fed meeting press conferences are dominated by talking heads looking for a hot quote to put in the paper or talk about on TV. But during testimony, the senators and congressmen who grill the Fed chair in Congress may be looking for the Fed chair to offer some sort of verbal snippet that they can use to justify an initiative that they’re pushing through the legislature, or they may be looking to find something that justifies their opposition to certain policies from the presidential administration or others in Congress.

Other times, the senators and congressmen may grandstand and discuss some economic plight, challenge, or concern, of their specific constituents. The goal of the legislators is similar to that of the press: Get the Fed chair to say something edgy you can use later, like having the chair say something about a change in healthcare while it’s being debated in Congress. The goal of the Fed chair is always the same: Don’t say too much, and don’t say anything with market implications that isn’t completely measured, because markets will move unintentionally, and you might have to walk back your statement, causing yet another big swing in markets as they correct.

Especially big no-nos are any hints at a timetable for changes in the federal funds rate, the Fed’s main policy interest rate, or any other changes of policy. Fed chair press conferences and testimony can be quite tense to watch, as the press and legislators are not on the Fed chair’s side. They have opposing goals for their interactions, and they stand in firm opposition, often, to the Fed chair.

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