Signaling

Has a dual meaning. The first is a monetary policy tool employed by the Federal Reserve. A fed spokesperson can influence the market without an overt change in policy by communicating expectations of future economic conditions, such as inflation, economic growth, employment, or interest rates. A notable example of signaling being Alan Greenspan’s 1996 speech, in which he addressed the stock market’s “irrational exuberance.” The Fed was concerned that stock prices (P/E multiples) were excessive and the market was, in their opinion, at risk of becoming a bubble—which it was.

The second is when information is transmitted, either intentionally or unintentionally. One example is when a firm either issues bonds or sells stock, it’s indirectly indicating that it is need of capital. Another example being when credit spreads are rising, the market is signaling the likelihood of increased defaults in the future.