This Wednesday will mark a historic event for financial markets. At 2:15PM on April 27, U.S. Federal Reserve Chairman Ben Bernanke will hold his first ever press conference. The session will occur immediately after the latest Federal Open Markets Committee (FOMC) meeting where the course of monetary policy and interest rates is decided. Given that investors are highly sensitive to anything that is merely discussed during these meetings, this press event may also end up being particularly memorable for its impact on the markets.
Until recent years, the Fed was an organization that mostly operated behind the scenes. The fact that investment markets are so reactive to changes in interest rates was a primary reason for this discretion. For the first 80 years after its founding in 1913, the Fed didn't even disclose the outcome of these meetings. Starting in 1994, they began issuing statements only when they changed interest rates. And it was only just 12 years ago in 1999 when they started issuing statements at the end of each meeting. Since then, investors have anxiously awaited each statement to comb it over, dissecting each and every word across a handful of paragraphs for any hint of a change in the direction of monetary policy.
The Fed holding a post FOMC press conference is the latest in what has been a rapid public relations evolution. This change has been an attempt to better inform investment markets about Fed actions on monetary policy. In recent years, members of the FOMC including Bernanke, the Board of Governors and selected regional Fed bank presidents have become increasingly ubiquitous. It is no longer uncommon to see Bernanke interviewed on 60 Minutes or a Fed governor/president speaking at some dinner event. And comments from FOMC members at speeches can range from the "dovish" members like Bill Dudley and Janet Yellen indicating they are inclined to keep interest rates low to the "hawkish" members like Richard Fisher and Charles Plosser suggesting the need to raise interest rates soon. It's almost as if the FOMC as a group has coordinated to get a voice out there for everyone. This way, if you have concerns about what the Fed is doing – whether it's keeping interest rates too low or raising them too quickly - you can be potentially reassured that somebody in the FOMC meetings is speaking on your behalf.
So what can we expect from the Fed's latest PR outreach on Wednesday? The format is set for Bernanke to make an opening statement followed by a 45-minute question and answer session with the press. Under this format, those that have been concerned about the way the Fed is handling monetary policy, they will have an open shot to address these concerns directly with the Fed chairman. For example, questions are likely to focus on the Fed, potentially ignoring mounting global inflation pressures (low interest rates helps to ignite inflation) and the chronically weakening dollar. Instead of trying to translate these conclusions from a brief statement or cobbling together comments from different FOMC members, we can hear the answer straight from the Fed chairman's mouth directly to the press.
The true key to the meeting will be any signals from Bernanke on the end of the Fed's stimulus program. It was at one of those speeches talked about above at the Federal Reserve Bank of Kansas City Economic Symposium in Jackson Hole on August 27, 2010 that Ben Bernanke kicked off the current stock market rally with his comments that definitively confirmed that another round of monetary stimulus to boost the economy was soon on its way. This latest program from the Fed – widely known as QE2 - is set to end on June 30, 2011, and FOMC members have widely suggested the need to avoid any further Fed stimulus (QE3) and let the economy stand on its own. However, a lively debate remains ongoing in investment markets as to whether the Fed will quickly return with QE3 once QE2 has come to an end. If the Fed really wants to make a splash at its first press conference, the setting would be right for Bernanke to communicate with clarity that the Fed intends to let QE2 expire and that it also has no plans to intervene again with QE3 later in the year (at least for now). Going a step further, any mention for the need for fiscal or monetary "austerity" would steal the headlines. Such comments would likely send stocks lower – just as monetary stimulus has helped inflate stocks to this point, the lack of stimulus would likely deflate stocks going forward.
So just as Bernanke's Jackson Hole speech in August 2010 marked the beginning of the stock rally, Bernanke's first press conference on Wednesday has the potential to mark the end. Of course, it is just as likely that Bernanke and the Fed will stay neutral in its comments on Wednesday and wait a few months before they begin to become more decisive on the end of QE2 and the potential for QE3 in the future. Regardless of the outcome, the Fed's Wednesday press conference represents the first major potential inflection point for investment markets in the current stimulus cycle, which makes it certainly worth the watch.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.