– You don’t need to run a trillion-dollar hedge fundto 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 causethe stock market to move significantly.Just a hint of the potential to raise interest ratesand 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 chairsays 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 decisionand 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 chairon the hot seat to reveal hints about future policythat are not written in the Fed statement.And some investors and analysts try to dissecteach and every word the Fed chair says,as well as every word in the Fed statementThese people are usually called Fed watchers,and the words that they watch the mostfor from the Fed are called Fed speak.
This is why the impact of thesepress conferences can be significant,especially if the Fed chair says too much.This has happened to more than one Fed chairin 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 interestrates 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 testifiesbefore the House Financial Services Committeeand the Senate Banking Committee,usually over a two-day period, twice per year.Fed meeting press conferences are dominatedby talking heads looking for a hot quoteto put in the paper or talk about on TV.But during testimony, the senators and congressmenwho grill the Fed chair in Congressmay be looking for the Fed chair to offersome sort of verbal snippet that they can use to justifyan initiative that they’re pushing through the legislature,or they may be looking to find something that justifiestheir opposition to certain policiesfrom the presidential administration or others in Congress.
Other times, the senators and congressmen may grandstandand 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 changein 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 anythingwith 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 timetablefor changes in the federal funds rate,the Fed’s main policy interest rate,or any other changes of policy.Fed chair press conferences and testimonycan be quite tense to watch, as the press and legislatorsare 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.