The Popular Sport of Fed Watching

Economists have been monitoring Federal Reserve actions for many years but only since the Volcker era (August 1979 to August 1987) have individuals become more interested in monetary policy. And only in the Information Age has every word uttered by Fed officials become fodder for the financial markets. Fed chairmen have come and gone over the decades, but recent chairmen have become household names: Paul Volcker, Alan Greenspan, and now Ben Bernanke. Volcker made a radical announcement in October 1979 that the Fed would target monetary aggregates (M1 and M2) instead of targeting the federal funds rate. Banks and investment firms sought out Fed-watchers, economists who estimated the daily reserve needs of the financial system, to help them grasp where monetary policy would be heading. Fed watching was becoming fashionable and glamorous.

In the mid-1980s, Fed-watching economists still estimated daily reserve needs and predicted weekly money supply figures such as M1 and M2. But the Fed was no longer targeting monetary aggregates directly, and following economic indicators gained stature. By appointing Alan Greenspan to chair the Federal Reserve in August 1987, President Reagan introduced the beginning of the modern era. Fed watchers who only knew how to measure reserve needs or how to estimate the weekly monetary aggregates were relegated behind the "real" economists who monitored the nonfinancial (ergo, real) side of the economy. Economic indicators, not monetary aggregates, dominated the news and financial market attention.

Indicators followed by the Fed... indicators followed by the Fed's Chairman

The Federal Reserve has followed the same goals throughout its history. " ... to promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates."

By definition, then, indicators that reveal inflation become important ones to follow. Federal Reserve policy-makers have long monitored the consumer price index (CPI) and the producer price index (PPI). More recently, Fed officials began to scrutinize the personal consumption expenditure deflator. They have also followed commodity prices. The Fed watches the employment report because it reveals labor market conditions. The Fed clearly is concerned with economic growth and follows trends in gross domestic product (GDP). The bottom line? Fed policymakers have long followed economic indicators that are currently financial market favorites. And it is possible that these indicators became financial market favorites because investors knew that Fed officials were monitoring them.

The arrival of Alan Greenspan to the hallowed halls of the Federal Reserve brought renewed attention to the detailed monitoring of economic indicators. Early on, financial market participants learned which indicators were particular favorites of the newly installed chairman (from August 1987 through January 2006). And these have become market movers. Over the years, Greenspan revealed many more favorites, frequently bringing new indicators to the lexicon. Financial market players were bombarded by more and more indicators that became market movers, if even for only a short period of time.

In the new millennium, the Fed became increasingly transparent about its monetary policy actions. The post-meeting statements became more forthcoming. Yet, post-FOMC meeting announcements along with a more expedient release of FOMC minutes (a three week lag rather than a six week lag) have helped market players and economists get a better sense of Fed policymakers' thinking. In fact, market players have become more confident in interpreting the comments of Federal Reserve officials themselves. For much of the new millennium, Fed-watching economists were no longer in their heyday. To a large extent, the Internet has allowed investors to easily gather much more information than ever before.  But the art of Fed watching would change after the recession that began December 2007.

A New Era Continues

Alan Greenspan's term at the Federal Reserve came to an end on January 31, 2006. Dr. Ben Bernanke, former Fed governor and former Chairman of the President's Council of Economic Advisors under George W. Bush, took over the reins of the chairmanship on February 1, 2006 and concluded January 31. 2014. Before he began his term on the Fed Board in 2002, Chairman Bernanke spent most of his career in academia; his research focused on monetary economic issues.

The new chair over a short time span certainly placed his imprint on the Federal Reserve. For instance, Chairman Bernanke was a proponent of inflation-targeting. During his term as chair, the Fed established a long-term inflation target of 2 percent for inflation for personal consumption expenditures. Also, one of his key areas of expertise is the Depression in which a massive credit crunch - along with other factors - caused much of the recent recession. His knowledge of past credit crises played a critical role in his willingness to take a variety of aggressive approaches to solve the recent credit crunch rather than relying solely on interest rate changes.  Indeed, Bernanke made a name for the Fed being innovative in implementing Fed policy based on Fed-funded rescues of key and about-to-fail financial institutions, establishing emergency credit facilities, implementing quantitative easing, and focusing on different interest rates for policy purposes.

Former San Francisco Fed president and former Fed vice chair Janet Yellen became Fed chair on February 1, 2014.  During confirmation testimony before Congressional committees, she indicated that she would essentially continue monetary policies established by the Federal Open Market Committee under Ben Bernanke’s leadership.  This includes continued scheduled taper of quantitative easing and continued low policy rates even after the unemployment rate dips below 6.5 percent—the Fed’s announced rate for considering changes in policy.