Kristina Hooper is the US investment strategist and head of US Capital Markets Research & Strategy for Allianz Global Investors. She has a B.A. from Wellesley College, a J.D. from Pace Law, a master's degree in labor economics from Cornell University and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.

Stocks have taken investors on a scary ride for the past few weeks. China and Asian markets as a whole have stirred up a lot of volatility. But perhaps the biggest takeaway is how much “Fedspeak” can impact markets. While it's far from a sign of the apocalypse, it should serve as a cautionary tale as we look ahead to the next several weeks.

New York Federal Reserve President William Dudley's comments last Wednesday have been widely credited with not only stopping the carnage on Wall Street, but actually reversing it and producing a positive week for stocks. Dudley said that recent international events and the stock-market selloff have made the rationale for raising rates in September "less compelling." He did offer the caveat that the case for raising interest rates could become more compelling in the weeks leading up to the next FOMC meeting.

The Weight of Words
To add to the confusion, Dudley reiterated that he would like to see liftoff in 2015 and that the data looks mostly positive. But, he added, "let's see how the data unfold before we make any statements about exactly when" liftoff might occur.

Say What?

Over the weekend, at the Kansas City Fed's annual symposium in Jackson Hole, Federal Reserve Vice Chair Stanley Fischer suggested there is still a good chance the Fed could begin liftoff in September or shortly thereafter. Fischer spoke on the topic of inflation, an area of focus for him given his tenure as the leader of Israel's central bank. Fischer argued that the forces keeping inflation low have already begun to dissipate—and he expects that to continue.

Reading between the lines, it seemed his intention was to assuage concerns that the Fed must reach its inflation target before liftoff. Since Fed Chair Janet Yellen chose not to attend this year's conference, Fischer's comments should have more impact on markets. However, Fischer's remarks may also confuse market participants, especially since they come on the heels of Dudley's comments.

“…having multiple FOMC participants giving speeches and interviews, and sharing their opinions, only adds to the uncertainty.”
Unfortunately, investors may be feeling a little bit dizzy by now. As we get closer to the possible start of monetary-policy normalization, it seems only natural that they will start to get nervous. But having multiple FOMC participants giving speeches and interviews, and sharing their opinions, only adds to the uncertainty. FOMC members have the right to express their own opinions but voicing them now, as we near a possible liftoff date and market sentiment is fragile, might not be the most constructive exercise.

The Burden of Transparency

Further, it seems the Fed's interest in being transparent, while well-meaning, is only piling on the volatility in markets. Maybe it was a lot easier to figure out what the Fed was thinking when all we had to go on was the size of a briefcase. Unlike a typical board of directors in which members are required to hold a singular view in public despite holding different opinions privately, the Fed allows its officials to present their views in public.

“…the Fed's interest in being transparent, while well-meaning, is only piling on the volatility in markets.”
Recall that the Fed was the only functional branch of government that we could truly rely on during the global financial crisis and afterwards. We can't underestimate the impact of it reducing its support—albeit very slowly.

Indeed, while becoming less accommodative is necessary, it's not going to come without consequences, particularly given how much the FOMC participants are talking. Imagine if Supreme Court justices commented on their opinions of cases before they were decided! And the effects of monetary policy in this environment are more far-reaching than virtually any case the Supreme Court could decide, particularly because of their global influence.

“Imagine if Supreme Court justices commented on their opinions of cases before they were decided!”
To put it plainly, things aren't going to change. Market participants have to get used to the FOMC's new transparency. But be prepared for more turbulence as investors try to make sense of the economic data and what FOMC participants are saying. Stay tuned for Friday's jobs report—and more Fedspeak.

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The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.
Past performance of the markets is no guarantee of future results. This is not an offer or solicitation for the purchase or sale of any financial instrument. It is presented only to provide information on investment strategies and opportunities.

A Word About Risk
: Equities have tended to be volatile, involve risk to principal and, unlike bonds, do not offer a fixed rate of return. Foreign markets may be more volatile, less liquid, less transparent and subject to less oversight, and values may fluctuate with currency exchange rates; these risks may be greater in emerging markets.

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