Risk Management, Trading & Portfolio Strategies

Economists watch Fed’s careful dance of expectations

The Fed's role in managing market expectations has grown significantly in recent years.

The Fed’s role in managing market expectations has grown significantly in recent years.

One could argue that the Federal Reserve's true role in the financial system is to manage expectations about the future of monetary policy. As their policy tools are geared toward long-term change rather than immediate, the American central bank must use the power it has to shift perception in positive directions in the hope that organic economic growth is spurred.

Things used to be different for the people at the Fed. For most of its history, the Fed's communication with the American public was in the form of statements from the Federal Open Market Committee (FOMC). Nowadays, the Fed has to contend with the 24-hour news cycle from a modern media community that demands as much information as possible. Chairman Ben Bernanke's efforts to encourage transparency through the use of press conferences – coupled with regular speeches given by him and other members of the FOMC – have essentially increased the expectation for more verbal guidance between the Fed and the market about the health of the economy and the future of U.S. monetary policy.

The Fed is not alone in this – the European Central Bank (ECB), another major monetary force in the global market, undertakes similar efforts in the European Union to manage expectations. Yet these actions could be part of the problem, as one wrong word or statement can send stocks and equities plunging in knee-jerk reactions. 

Given the market's propensity for rising and falling based on Fed comments, investors might want to protect themselves with automated portfolio alerts that trigger safeguards before losses start to mount. SmartStops are an innovative system for reacting to risk and protecting profits. Learn more about how SmartStops can change your investment strategy for the better by clicking here

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