Informed investors can hear FED market direction signals when the Chair speaks during post meeting news conferences. Investors that listen to the FED can gain market insights from the words of these most influential civil servants. That can make a bottom line difference for both markets and investors. While, strictly speaking, the FED does not give market directions, investors can hear the market direction expectations from the Chair.

Does the FED give market directions?

This lesson 4 from the Investors, The FED and Central Banks course 145, details how the FED presents their findings, decisions and expectations. That information helps investors see the way ahead. At the end of the lesson, links to related content help you learn more.

What you learn:

Learn how to listen when the FED speaks. When we known how to listen we can hear the FED market direction signals. As part of satisfying the FED goals to stabilize currency, keep employment high and prevent inflation, they communicate with the public. That message contains valuable information that investors can use to manage investments and grow profits. Knowing and understanding what the FED says helps you become a better investor.

Hearing the FED direction expectations

From their central bank beginning over a century ago, the FED first operated as a closed inside group with little to say to the public. Thankfully, over time that changed for the better. Now a FED Chair news conference follows each meeting which occurs about every 6 weeks. Those conferences provide statements with much important and useful information. That information can be used by investors to manage investments and better understand markets. The Board of Governors appointees plus representatives of the 12 regional bank presidents meet 8 times a year. They also meet with bankers from around the world at the annual Jackson Hole, Wyoming, conference. These are smart, qualified, informed and talented professionals doing their best to meet the FED goals. Following each meeting, the FED Chair news conference has a recurring presentation pattern covering 6 topics when giving the Fed market direction signals. Those 6 topics include:

Recurring FED news conference topics

• Economic developments since the last meeting.

• Monetary policy issues on employment and price stability.

• Decisions made at the current meeting.

• Forward guidance on probable monetary policy decisions.

• Factors the FED considers may affect future policy decisions.

• How each member voted at this meeting.

Even a group as elite and economically sophisticated as the FED Board are not able to predict or accurately forecast the economy. But they do keep working at it and following the above topic pattern, the FED Chair, explains their strategy during each news conference. That report on the FED outlook, concerns and expectations gives investors excellent insights. FED statements regularly point out that the FED is the U.S. central bank and not the central bank of the world. However, the massive impact of any FED change can have on U.S. economic activity, does immediately have direct world wide impact. So like it or not, the FED is certainly the most important central bank of any nation.

The predicting probables problem of the FED market direction signals

When it comes to the economy and our money, we want to know what is next and especially to be warned if a recession is coming. We want answers from all those economic experts at the FED. Perhaps we expect a FED formula to crank out a clear certain answer. But they have a few serious problems giving that clear certain answer that we want. That is because the tools they must use to get those answers come with significant flaws.

Four flaws in the predictive formula mix of FED market direction signals include: 

• Data flaws - bad, irrelevant or changing data

This is the big one, ye old garbage in, garbage out problem. The FED is under pressure to make timely decisions to give FED market direction signals. But when some decisions must be made, the FED relies on possibly flawed data. At times, in fact fairly often, relied on data gets significantly revised. Those after the fact revisions can change the economic outlook. When attempting to make timely decisions based on economic data, revisions are particularly common as more and better information becomes available. At times, such revisions radically change data from being clearly positive and useful to become misleading, confusing or even clearly negative. At other times, positive data gets undermined or eliminated, although a decision already made, can not be changed. As a result, management decisions made under pressure can seem clear and well supported by in the moment. However, when the data changes, decisions can be shown as poor choices or absolutely wrong. As can always happen, vision improves when viewed with the benefit of hindsight or new and changed information. Gross Domestic Product (GDP) measures the total of all goods and services produced in an economy. GDP forecasts from the FED have a history of missing the mark. Reality, especially the future, is very hard to accurately predict! In a world of changing data, FED Board members must feel like they get handed a new and different map when already halfway through the trip! Still we want to arrive where we want to go! And yes, keep us on time and on budget! So, data flaws can tie up one arm of the economist trying to forecast or predict the economic future.

• Inaccurate and changing economic roadmap

Speaking of maps, there is no economic roadmap that has all the answers. Economists are still figuring out what the economic roadmap should look like and how the economy actually works! As they learn, we are all part of this great developing economic experiment! Much is known and new economic truths continue to be developed. But for the time being, we and the FED just go ahead thinking what we are doing must be working! But, we never know for certain if that is so. Making it up as we go on our way can seem disconcerting...but what choice is there? Through time we are getting better at this. Still, we certainly never hear anyone admit they got it wrong! Have the FED decisions always been right? I don’t think so. Especially when it comes to the twists and turns of everyday economic life, economists don’t get that very well. They seem better at the big picture and predicting productivity and population effects. Except for inflation. Inflation still seems to have twists and turns economists have not yet figured out. And that includes the best of the FED economists. By expecting the FED to show us the way using an inaccurate and changing map we tie up another arm of economists. The job of predicting the future economy is tough!

• Navigating in reverse

We would not consider taking a drive down the road by looking out the back window! How are we doing so far would be irrelevant at the first twist or turn. Yet all the data economists use looks at history; the data collected comes from the past! And they use the past data when attempting to see the future. Like our rear view mirror driving or generals preparing to fight the last war, we can not expect a backward looking economists to have a good view of the future. Another flaw that ties up one more arm...but who’s counting?

• Tool deficit

Finally, when it comes to predicting the next recession, what is the right tool? When does the predictable become unpredictable? Can we know in advance when of if the economy turns? FED analytical formulas and tools as well as decisions on what sectors and weights to use all have a common history. They do not work. Should we make inflation the focus or has that become an obsession. Does it matter or not? Should we consider inflation risk over growth risk or just what should we look at and how do we do that? You get the point. We don’t know and neither do they. But they continue to seriously work on it. Until someone comes up with a better way of doing this, we can expect more of the same. And that flaw is the fourth that can tie up any free arms should there be any available! These points are made to tell you how very difficult it is to understand the ins and outs of the economy. This is not intended as a blanket criticism of the FED. I am a huge fan of the FED and the important role played by central banks. We are certainly getting better at it, but economists have a long way to go before mastering how the economy works.

What's right about the FED market direction signals

The FED gets many things right most of the time. That is, despite those seriously flawed tools and techniques, the FED Chair gives us considerable amounts of valuable information with the FED market direction signals.

• We learn of lowering, raising or unchanged interest rates.
• FED presents an outlook, issues and concerns or developments.
• The FED tells us what they expect to do in the future.
• We learn of factors seen as future concerns.
• They reveal member votes and detail any descents.

That information gives us a clear indication of where the FED expects the economy to be in the future. Remembering they do it all over again in 6 weeks, we get an expert level of economic guidance. That gives us useful information that we can put to work making money.

Chairs deliver FED market direction signals

Once the FED leadership understood the importance of communicating with the public, things changed. In my memory the FED market direction signals began with the strong inflation fighting messages of Paul Volcker. His term as FED Chair began at the end of the tumultuous inflationary 1970s. He served Aug. 6, 1979 - Aug. 11, 1987 and began a period of huge change in the economy and at the FED. The FED set interest rates of 20% to open the 1980s in a battle with double-digit inflation. Paul Volcker was a giant of a man and a colossal economist as FED Chair. Under his leadership a lid got put on inflation! That established the central bank as the power that could control inflationary fires. His public statements were the first presentations of economic performance art events that have now become part FED Chair job description. Beside establishing the inflationary lid, he also imposed the Volcker Rule on banks. The Volcker Rule prohibited banks from some types of investment activity with their own accounts. It stopped banks from using customer deposits to invest for their own profit. They could not engage in proprietary trading, own hedge funds or private equity funds. Like all things the FED tries, the first time may not go as well as they may hope. Inflation fighting with high, inflexible, unrelenting interest rates turned out to be a messy business. Looking back it seems the very high interest rates were kept on too long. As a result, inflation was tamed but the economy also declined to became the early 1980’s recession. Recovery came mid-decade but it was time for a new FED. Under Volcker we learned that inflation can be tamed and questionable bank practices can be controlled.

Alan Greenspan was FED Chair Aug 11, 1987 - Jan 31, 2006

Shortly after the appointment of Alan Greenspan the 1987 Black Monday stock market crash on Oct 19 overwhelmed NYSE traders with a 22% drop. All world markets dropped raising fears of a new depression. Under Greenspan, the FED responded with easy money by pumping in funding for banks allowing the crash effects to be relatively short lived. In other central banks that did the same also limited the effects on the real economy. In contrast the New Zealand Central Bank did not go with easy money or pump in liquidity. That had long-term real negative consequences in play throughout the New Zealand economy. The lesson for us is clear. Central banks can effectively intervene and delivers positive real economic impact. Under Greenspan we learned that fast responses and easy money can work to increase economic activity and spread prosperity throughout the economy.

Ben Bernanke was the next FED Chair

Ben Bernanke served Feb 1, 2006 - Jan 31, 2114. His huge contribution is covered in lesson 2 of this course, FED billions bounced depression

Janet Yellen makes Fedspeak transparent 

Janet Yellen served as FED Chair Feb 3, 2014 - Feb 3, 2018 during one of those infrequent times when the economic way forward can be clearly seen. The stars and perhaps the tea leaves were in alignment! For an extended period the equity markets steadily climbed higher and higher. The big events of her term we associated with moving beyond QE into tapering and QT are deeply covered in lesson 3, FED begins Quantitative Tightening

Janet Yellen tells us it is more of the same

At the Senate confirmation hearing into Janet Yellen’s appointment anyone listening would come to the same conclusion that I did. The well established Fed policies will continue. While she will not win any public speaking awards for her style, her clear communication skills, intelligence and experience shine through. This architect of the Fed’s Quantitative Easing program, did not surprise anyone when she indicated her full support for the current Fed direction and methods. Janet Yellen said that under her direction, the extended period of easing will continue even after the employment rate reaches desired target levels! That means she will continue the same central bank policy for an extended period after reaching a key economic goal. Put into plain English that means for the foreseeable future the massive US economic stimulus will continue for possibly more years yet. The stimulating effect of that seemingly endless deluge of money keeps the risk of deflation in check. Without any sign of widespread inflation in America there is only one way for the market will go – higher! In fact the massive $85 billion monthly financial injection extends the upside for at least 5 more years! That is the absolute minimum period needed to unwind the purchases made each month. So each month we know the program will be around for at least another five years! That is not saying no market correction or bumps in the road during that time. They will happen. However, under the economic pressure of such massive stimulus, any corrections or short downturns will be limited. They will be buying opportunities. But when they occur, such opportunities will quickly pass and we will resume going higher yet.

Fed policy under Janet Yellen

In multiple statements Janet Yellen strongly committed to continuing Quantitative Easing, the Fedspeak for pumping massive amounts of liquidity or cash into the system. That keeps funds moving and the economic wheels turning. Janet Yellen said the Quantitative Easing programs would continue. “I consider it imperative that we do what we can to promote a very strong recovery.” 

Financial stability by Janet Yellen

Janet Yellen talks of a most important task: “ramping up and monitoring of the financial system…to detect financial stability risks” There was wide awareness and support for bank regulation reform. It certainly increased monitoring of banks compared to the pre-2008 hands off regulatory environment. The 2008 financial crisis shocked and froze the international financial system.

Janet Yellen on Mega-banks

Janet Yellen has said, “It’s extremely important for our banks to have more capital, higher quality capital.” That pointed to decreasing the extreme leverage the huge banks used to inflate the financial crisis. With other regulators around the world, she supported steps to more tightly control banks, “the most important systemically important institutions.” She has said “those who failure would create financial distress, will be asked to hold more capital.” She believed the capital surcharge proposed for systemically important financial institutions should be significantly raised. That could be good news. The huge banks have power and benefits of no other institution. “Our objective in regulation should be to put in place tough enough regulation and capital and liquidity standards that we level the playing field and make it costly.” Hmmm…she refers to the world’s most powerful financial institutions. I am skeptical that any significant changes will happen on this front. She said, “We should make it tougher for them to compete and encourage them to be smaller.” We were right to be very skeptical of this wishful thinking.

Banking oversight by Janet Yellen

Thousands of other financial institutions rank as smaller than the handful of maga-banks. These other banks also need effective oversight to make the system work. “I absolutely believe that our supervisory responsibilities are critical and they’re just as important as monetary policy. We need to take just as much time to devote to them.” If effective, this is all good news. “We don’t want these entities to fail” Janet Yellen said, “We want to make them much more robust and less likely to come under pressure,” she said. “Then if something did happen, we would have a way to deal with it that we were not able to do during the financial crisis.”

Janet Yellen on asset bubbles

The U.S. housing asset bubble in one way or another, touched everyone. That makes it easy to agree with Janet Yellen saying, “No one who lived through that financial crisis would ever want to risk another one…” She promises, “We have a variety of different tools that we can use if something like that were to occur.” We have to wait and see, but good to know that someone so able and knowledgeable is on the scene. She remains central to the economic rescue program and remains on watch.

The next Chair Jerome Powell

Current Chair, Jerome Powell is covered in detail in lesson 5 of this course, Most Powerful Civil Servant

Can the bull run forever?

Absolutely not! Some day the bull market ends and the piper will have to be paid. But listening to the FED helps us be aware and ready for change.

Question Answered!

We know the FED does not give market directions but that informed investors have learned how to hear FED direction expectations. To meet the FED goals of a stable currency, high employment and controlled inflation, they communicate with the public. Their messages contain valuable information that investors can use to manage investments and grow profits. Listening to the FED says us be better investors.

Lesson takeaways, FED market direction signals

Informed investors can hear FED market direction signals when the Chair speaks. During post meeting news conferences, investors can gain market insights by listening to the FED. The words of these most influential civil servants can make a bottom line difference for both markets and investors.

• Learning how the FED speaks helps us listen
• FED news conference topics repeat
  • Economic developments
  • Decisions made
  • Forward guidance
  • Future issues
  • Voting record
• FED prediction challenges
  • Data flaws
  • Inaccurate and changing economic maps
  • Navigating in reverse
  • Tool deficit
• FED gets much right
  • Interest rate decision
  • FED economic outlook
  • Future expectations
  • Future concerns
  • Review of voting
• FED Chairs taught lessons
  • Paul Volcker put a lid on inflation and bank misbehavior
  • Alan Greenspan loosened the pursestrings with easy money
  • Ben Bernanke eliminated depression possibilities with QE
  • Janet Yellen supported QE, tapering and QT
  • Jerome Powell deals with tapering through boom times

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Investors, The FED And Central Banks, lesson links:

Central bank creation and role explained Lesson 1 FED billions bounced depression Lesson 2 FED begins Quantitative Tightening Lesson 3 FED market direction signals Lesson 4 Most powerful civil servant Lesson 5 Trillions stimulated Japanese economy Lesson 6 Central Banks of Canada, UK and Europe Lesson 7 Central bank lid and base setting Lesson 8

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