A Beginner’s Guide to “Fedspeak”

Do you speak the language of the Federal Reserve? Known on Wall Street as “Fedspeak,” this vocabulary can hold the key to your investment moves.

Knowing what to look for in the statement released by the U.S. central bank following each of its official meetings can help you understand the market’s reaction to a release and to make smart bets if you think the market move is overdone.

In the late 1990’s American economist Alan Blinder called Fedspeak  “a turgid dialect of English.”

Turgid, defined as bombastic or tediously pompous, is precisely how Fed governors used to speak. In the earlier part of the century, Federal Reserve Board chairpersons purposely provided vague and ambiguous statements regarding monetary policy.

The idea was that if investors were not entirely clear about the direction of interest rates, they might not overreact with large buy or sell orders. Fedspeak once was called “Greenspeak,” named after the highly influential Fed Chair Alan Greenspan, who presided over the Fed from 1987 to 2006. Greenspan was famously turgid in this pronouncements.

But beginning in 2004 with Fed Chair Ben Bernake, Fedspeak took on a new dialect. He ushered in a less opaque style of communication. In 2014, this new direct and clear manner of communication was renamed Fedspeak 3.0 and was used extensively by Chair Janet Yellen.

Current Fed Chair Jerome (“Jay”) Powell simplified the language even more. His recent remarks from the Fed’s December meeting used simple language instead of wordy monetary jargon.

In 2011, to provide further clues into the Federal Reserve’s thought process, Fed members developed the Dot Plot, a histogram that shows the projections of each of the Fed’s 16 members for the level of future interest rates. The Dot Plot is updated after each meeting; below is the latest version.

The Powell Panic

This abundance of information makes the market’s dramatic decline last Wednesday following the Fed’s meeting all the more surprising. Most investors anticipated the decision this past week to increase the federal funds rate by a quarter of a percentage point, to a range of 2.25% to 2.50 %. That change went according to plan.

However, it was Jay Powell’s commentary that inspired some to hit the sell button.

Despite the Fed never indicating that it would halt or pause interest rate increases, the 20% decline in the market since early October and the slowing of several global economies led some to believe that it would change its course and indicate a suspension of further hikes.

Instead, Mr. Powell said it is more likely that the Fed will issue two rate hikes instead of the prior expectation of three. This had the same effect as finding one, not two pieces of coal in your stocking instead of candy.

Over the past two years, the Dot Plot suggested increasing rates. Fiscal stimulus in China, a resumption of growth in Europe and the slow but steady improvement in the domestic employment market suggested higher rates would be necessary to cap inflation.

Jay Powell noted last Wednesday that the rate increases effected this year were “anticipated in the median projection a year ago…because the fiscal stimulus adopted near the start of the year was larger and more front-end-loaded than most had anticipated.”

Of course, as with most prognosticating entities, the Fed reserves the right to change its mind based on any unanticipated squiggle in economic indicators. Prior growth forecasts likely did not incorporate the effects of tariffs, Brexit flip-flopping, and consumer push-back on social media advertisers.

Each one of these extraordinary events is independent of the traditional economic cycle but can potentially throw a wrench into the global economy. As you build a 2019 forecast, it’s worth interpreting the Fed’s language.

Indeed, as they formulate their best picks, my colleagues at the Investing Daily Wealth Society are weaving higher rates into their forecasts for the market. The good news: they boast a proven track record of getting ahead of the curve and making money for their followers, regardless of Fed policy gyrations.