The Fed chairman and Governors are often out speaking. Aren’t they giving away their secrets?


Written by: Jon McGraw

The Fed chair, governors and district presidents find themselves in the unique positions of not only being policymakers and ‘deciders’ of Fed policy, but also as proponents of the banking system and in pseudo-public relations roles, especially when Fed policies have been more controversial.  In recent years, many of these speaking engagements have added additional color to the more formal statements that follow official FOMC meetings, clarifying the ‘why’ and ‘how’ in many cases that are left somewhat unexplained or ambiguous.

Often, these speeches focus on a particular segment of the economy, such as housing, bank lending, money supply, interest rate theory or other data, which the market can interpret positively or negatively (assuming it pays attention, which it may not unless the commentary bucks established expectations).  The transcript of the speeches is often released, as is a summary of the Q&A that can follow.  For example, one governor in October described the taper decision in September as a ‘close call,’ and alluded to more concerns surrounding the government shenanigans and shutdown than was formally included in the FOMC statement.  Another Fed president in August noted that tapering should be referred to as a ‘cautious first step.’  These are things we already assumed, but this color is often useful in learning what decision and economic data points are most meaningful to the committee at any given time, adding a ‘humanness’ to it.  This may drive future market reaction to data points deemed more relevant to tendencies of a particular Fed chair or FOMC composition.  These types of things are often subtle, but meaningful, nonetheless.

While making attempts to separate politics from economics, the speakers also tend to play a ‘PR’ role in explaining why the government acts the way it does, or to defend past behaviors (as in extraordinary stimulus injected during the financial crisis, or why we need such stimulus now, several years later).  In some cases, dissenters might explain their views relative to the consensus.  Naturally, most investors don’t have in-depth training in financial affairs, so such discussion is intended to help add transparency to what can look like convoluted operations behind the scenes.

What’s often refreshing about these speeches/discussions is that we often find Fed personnel don’t have any better of a crystal ball than anyone else.  Their policy goals are often complicated, with a variety of aims, and often relatively few tools to implement them.  Members can’t know the exact final outcomes of policy decisions (how could they?) but make these decisions based on probability of potential outcomes.

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