Fed Speak

What is Fed Speak?

Fed speak is a phrase used to describe former Federal Reserve Board Chair Alan Greenspan's tendency to make wordy statements with little substance. Many analysts felt that Greenspan's ambiguous "Fed speak" was an intentional strategy used to prevent the markets from overreacting to his remarks. The assumed intent of Fed speak was to obscure the true meaning of the Fed's intent in an effort to reduce anticipatory action by the market or the investment public. Since Greenspan's reign, other Fed chairs have communicated in a much more concise and direct manner. 

Understanding Fed Speak

Fed speak is one technique for managing investor and public expectations regarding the current and future monetary policy. Fed speak seeks to deliberately obfuscate policy makers’ intentions in order to prevent markets from anticipating their impact and adjusting prices accordingly. 

Alan Greenspan, who was chair of the Fed from 1986 to 2006, was known for making vague statements that were not easily interpreted. For example, following a speech Greenspan gave in 1995, a headline in the New York Times read, "Doubts Voiced by Greenspan on a Rate Cut," while the Washington Post's headline that day said "Greenspan Hints Fed May Cut Interest Rates." Greenspan's successors, starting with Ben Bernanke, have been known for making more direct statements.

The goal behind Greenspan’s Fed speak is based on the economic theory of rational expectations, especially the work of Nobel Prize winning economist Robert Lucas. This theory suggests that when market participants can anticipate a monetary policy move by the Fed, then they will form rational expectations about the ultimate impact of the change in monetary policy on prices and interest rates, and that these rational expectations will quickly be incorporated into present prices and interest rates. 

However, if prices and interest rates can immediately adjust to the new monetary policy, then the policy will tend to have little or no impact on real economic performance indicators such as employment and real output. For example, fully anticipated expansionary policy would only lead to higher price inflation and higher nominal, long-term interest rates, without reducing unemployment. Thus, rational expectations and compensating behavior by market participants, can hinder the Fed’s ability to achieve policy goals related to full employment and economic growth. Under this theory, only unanticipated monetary policy changes, working their way through the various transmission mechanisms that economists have described, can change real output and employment.

So in order to reduce unemployment and spur economic growth, the The Fed would need to prevent market participants from anticipating its monetary policies. It is widely understood that Greenspan’s Fed speak was intended to do exactly this. By employing deliberately vague and confusing language, he hoped to prevent market participants from anticipating monetary policy decisions. 

At the time Greenspan’s strategy of Fed speak was criticized and sometimes ridiculed as obscurantist and working against the market. However these criticisms were balanced against the fact that Greenspan’s tenure as Fed chief was characterized by reasonably stable economic growth and relatively mild and infrequent recessions. However, some economic research has actually shown that market uncertainty regarding monetary policy can itself have negative consequences for the financial system and the economy. 

Greenspan’s strategy was replaced by a different thinking on how to manage investor and public expectations under his successor Ben Bernanke. The new strategy, known as forward guidance, has been to issue very clear statements of intent for ongoing monetary policy with the goal of shaping expectations to direct prices and interest rates to support monetary policy goals. This renewed transparency is also intended to reduce market uncertainty around monetary policy, especially during periods of economic crisis or recession. It has become the general norm for U.S. monetary policy since the end of Greenspan’s chairship.