Why does the market pay so much attention to the Federal Reserve Chair's remarks?

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Why Does the Market Pay So Much Attention to the Fed Chair's Speeches?

You can imagine the Federal Reserve (full name: Federal Reserve System) as the world's largest "central bank," and the Fed Chair is the head of this "super bank." He holds the "faucet" switch for the U.S. dollar, the world's universal currency—interest rates.

Every speech he delivers causes global stock, foreign exchange, and bond markets to tremble, primarily for the following reasons:

The Core Weapon: Interest Rates, The Root of Everything

One of the Fed's primary tasks is to adjust interest rates, which is akin to controlling the accelerator and brakes of the economy.

Rate Hike (Applying the Brakes): When the economy overheats and inflation (prices rising too quickly) is too high, the Fed will raise interest rates. This makes borrowing money more expensive, leading both companies seeking loans for expansion and individuals for homes or cars to be more cautious. Consequently, there will be less money circulating in the market, consumption and investment will cool down, thereby bringing prices under control.
Rate Cut (Pressing the Accelerator): When the economy is sluggish and there's a risk of recession, the Fed will lower interest rates. Borrowing becomes cheaper, encouraging companies and individuals to take out loans, invest, and consume, thereby stimulating economic growth.

These "interest rates" don't just affect the U.S.; because the dollar is a global currency, they influence the economies of almost all countries worldwide. The core of the Fed Chair's speeches is to reveal whether the future will involve "hitting the brakes" or "pressing the accelerator."

Markets Trade the "Future," Not the "Present"

Financial markets are like athletes always trying to get a head start; everyone is betting on what will happen "next."

When the Fed announces a 25-basis-point rate hike, the news itself may have already been priced in by the market (i.e., stock prices have already risen or fallen in anticipation). What people are truly concerned about is: Will there be another hike next time? When will rate hikes stop? And even, when will rate cuts begin?

The Fed Chair's speeches are a "treasure map" for finding the answers to these questions. His choice of words, tone, and description of the economy all transmit signals about the future to the market. Traders will analyze his speech transcript word for word, as if doing a comprehension exercise.

So, What Exactly Are People Listening For?

During the Chair's speech, global investors and analysts will prick up their ears, primarily listening for these things:

"Coded Messages" About Interest Rates Will he say, "We still have a long way to go" (implying continued rate hikes)? Or "We need to be patient and observe the data" (suggesting a possible pause in rate hikes)? Even a single word change can cause significant market volatility.
The "Economic Health Report" How does the Chair view the current U.S. economy? Does he believe the job market is strong? Does he see a risk of recession? If he expresses concern, investors might become fearful and sell stocks. If he is confident, it could boost market sentiment.
His "Stance" on Inflation Does he believe inflation remains a serious problem? Or does he feel there's "light at the end of the tunnel"? His attitude towards inflation directly determines the future stringency of monetary policy.
The "Tone" of the Speech—Hawkish or Dovish? This is a vivid metaphor you'll often hear:
- Hawkish: Like a hawk, with sharp eyes, advocating strong measures (e.g., significant rate hikes) to combat inflation, even if it causes some economic pain.
- Dovish: Like a dove, gentle and more concerned about economic recession and unemployment, favoring looser policies (e.g., rate cuts) to preserve growth.
The Chair's overall tone directly determines market expectations. If he sounds "hawkish" today, the stock market might fall; if he sounds "dovish," the market might cheer.

To Summarize

Simply put, the Federal Reserve Chair is one of the most powerful financial officials globally, holding the "pricing power" over the U.S. dollar. His speeches are so crucial because:

He determines the cost of money (interest rates), influencing the global economy's temperature.
His words are the most vital clues for the market to predict the future, and everyone seeks opportunities for profit or risk avoidance from them.

Therefore, when the Federal Reserve Chair speaks, global traders hold their breath. Because every word he utters can stir up a storm in the financial markets.