As strange as it may seem to those who have been in financial markets for a while, the most significant utterances from the Federal Reserve’s Open Market Committee (FOMC) these days don’t really come in the actual release of their decision at the end of their monthly meetings, even those that fall at quarter’s end and are accompanied by a press conference, such as last week’s.
They certainly did until quite recently, as traders and investors awaited the rate decision or other monetary policy decisions with bated breath each quarter.
In the current environment, it is this week, the week after the meeting, that is really significant and demands our attention.
The Fed has a policy of not allowing FOMC members to speak publicly about their feelings on policy for a week and a half or so prior to the meeting, the so-called "quiet period."
That embargo on public speaking ends at midnight on the day after the meeting concludes, but it is the week following the announcement when the chatter really resumes.
This week, for example, there are eleven speeches scheduled from nine of the FOMC’s twelve members. Fed Chair Janet Yellen’s keynote speech to a conference in D.C. on Thursday morning will be the most closely monitored, while the award for the most speeches goes to Chicago Fed President Charles Evans with three engagements this week.
Paying attention to the utterances of FOMC members is nothing new; even back when I started in financial markets thirty some years ago, every institution worth its salt had at least one person designated a “Fed watcher” who was paid to do just that.
What has changed is that it is no longer necessary to be an expert on arcane “Fedspeak” to make sense of what is said. These speeches can still be extremely dry and wonkish, but now usually contain a clear indication of how the speaker feels and how they are likely to vote at upcoming meetings.
Ben Bernanke really instituted this new, much more open Fed where FOMC members were encouraged to fully voice their opinions. In the past, particularly under Alan Greenspan, the committee members believed that policy should only be known at the time of the announcement following meetings. The problem with this, of course, was that it didn’t stop people looking for clues in the words of Fed members as to what was likely to happen, and that frequently lead to excessive speculation and severe disruption when the guesses were wrong.
The rationale behind the shift that Bernanke made to more public deliberations was sound. Firstly, we live in a world where information is freely available and that makes secrecy of any kind a difficult proposition. In addition, as the Fed was forced into unconventional monetary policy such as Quantitative Easing (QE) to deal with the recession, Bernanke thought it important that those policies were fully understood and that the best way to achieve that was by a much more open approach to dealing with the press and public.
His successor Janet Yellen has continued, and some would even argue extended, that approach.
So, this week we will be treated to eleven instances of FOMC members giving their views on last week’s hike and, more importantly than that, the desirability of future rate increases. The so-called “dots” (the projections of FOMC members for prevailing interest rates at various times in the future) give us a definite clue as to where each member stands but the speeches tend to also give the reasoning behind their view. This is particularly important now.
Janet Yellen said in the press conference last week that speculation about stimulative policies from the President and Congress such as tax cuts and an infrastructure spending program played no part in the committee’s decision. That would indicate that if such policies are enacted, there will be pressure on the committee to hike rates even more than is currently indicated.
Yellen’s assertion was that such speculation wasn’t considered by the committee in its deliberations, but what we will probably find out this week is whether it factored into the positions that individual committee members adopted.
If it did, then a continuation of the very gradual path of rate normalization would be expected, making it easier for stocks to continue their rise. If, however, individual members make it clear that they considered only historical data in reaching their decision, that opens up the possibility of more drastic moves should there be fiscal stimulus, which could, in turn derail stocks.
Either way, it is this week, rather than last week, that will give traders and investors the most clues about the Fed's thinking.