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The Federal Reserve's fame comes from its high profile position as the manager of monetary policy. The Federal Open Market Committee (FOMC), composed of the seven governors and five district bank presidents, meets eight times a year to set the agenda for credit market policy based on economic conditions. The president of the New York Federal Reserve is a permanent voting member of the FOMC, but the remaining 11 presidents alternate their terms. When the economy is booming, it is the Fed's role to dampen activity by tightening credit conditions or raising interest rates in order to preclude the onset of inflationary pressures. When the economy is sagging (with no inflation), it is partly the Fed's job to give it a booster shot by easing credit and reducing interest rates.
Paul Volcker, newly appointed by then-President Jimmy Carter, stunned financial markets in late 1979 by declaring his intentions to target monetary aggregates (M1, M2, etc) in order to eradicate the high inflation of the period. Volcker vacillated back and forth between targeting monetary aggregates and the federal funds rate. No matter, he did dramatically alter the course of inflationary expectations in the 1980s. He also set the stage for his successor. Alan Greenspan surpassed Volcker in celebrity in the late 1990s, but certainly has followed a similar path of inflation reduction. Greenspan's background as an economic consultant and forecaster meant that the Fed would monitor conditions somewhat differently from the Volcker era. Moreover, the age of information technology ensured that ever more individuals not just market professionals --- would become enamored with the whole process of Fed watching. A new era of Fed watching was born - one in which monitoring economic indicators would surely give analysts a leg-up on the competition. Fed watchers had existed before, but they were conditioned to monitor arcane details. These days, Fed Watching involves the tricky interpretation of Alan Greenspan's ruminations and mutterings. But it also involves understanding more objective elements as well. The current group of Fed governors and Fed district bank presidents is highly geared toward economic indicators. (A good number of the current batch of FOMC members was trained as economists after all.) Deciphering Fedspeak and Fed actions has a direct impact on investors' bottom line. In the old days, bond investors were more likely to care about Fed pronouncements because of their immediate impact on bond prices (and bond yields). Today, stock investors also realize that changing interest rates directly impact equity prices too.
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