The Popular Sport of Fed Watching
Economists have been monitoring Federal Reserve actions for many years but only since the Volcker era 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 only two have become household names: Paul Volcker and Alan Greenspan. 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. And these 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. While the Fed began to announce policy changes in the mid-1990s, the post-meeting statements became more forthcoming in the past five years. Transparency is a relative term, however, and it remains to be seen just how transparent the Fed really is. 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. Fed-watching economists are no longer in their heyday. To a large extent, the Internet has allowed investors to easily gather much more information than ever before.

A New Era Begins
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. Before he began his term on the Fed Board in 2002, Dr. Bernanke spent most of his career in academia; his research focused on monetary economic issues. Without a doubt, the new Fed chairman is highly qualified in his position.

The new chair will certainly place his own imprint on the Federal Reserve. For instance, Dr. Bernanke is a proponent of inflation-targeting. Whether or not the Fed establishes such an inflation rule, there is no question that inflation indicators remain key to decision-making no matter who is at the helm of the Fed. Undoubtedly, many of the same key indicators will remain important to Fed officials who are voting and non-voting members of the Federal Open Market Committee (FOMC) each year. This section is updated as needed as global economic conditions - that determine what matters most to Fed officials at any given time - change.