Friday, July 21, 2006

Talking Head

The Federal Reserve System is
headquartered in the Eccles Building on
Constitution Avenue in Washington, D.C.

This week Congress heard again from the Talking Head - head of the Federal Reserve, Chairman Ben Bernanke, that is. Again the U.S. stock market reacted wildly as traders interpreted his comments as an indication the “Fed” was finished or nearly finished with interest rate increases. During and following previous testimony before Congress and other public appearances, the market reacted with equally dramatic action over Bernanke’s comments.

Investors have come to cringe when Bernanke takes the microphone. In the few months since he took over from Alan Greenspan, Bernanke has spoken three times in formal presentations to the public. These talks were in addition to his very informal chat with Maria Bartiromo of CNBC at the annual White House Correspondents’ dinner on the evening of May 1 this year. Each time the stock market has been whipsawed one way or the other.

The post of Federal Reserve Chairman appears to have become more visible over the years, in part through the influence of Alan Greenspan. In fact, my “Fed Vociferous Index” follows fairly closely along the stock market. As the market entered the long Bull Run of the late 1990’s Greenspan was particularly “chatty,” speaking formally thirteen times in 1997 and fourteen times in 1998. Greenspan gave ten speeches in 1999, including his famous diatribe on “irrational exuberance” in the stock market.

By 2000, after the stock market fell apart and investors’ spirits had been beaten back, Greenspan quieted down as well. He spoke only six times that year, including the two regularly scheduled appearances the Federal Reserve Chairman makes before Congress to report on monetary policy.

During the years 2001 through 2004, Greenspan seemed to pace himself, speaking formally just eight times in each year. However, in 2005, as the market recovered Greenspan appeared ten times before Bernanke took over. Then again, maybe it was only the sight of his own retirement that made Greenspan appear reluctant to relinquish the microphone.

One way or the other it seems clear that "when the Head talks, the market listens."

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