Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
One manifestation of such caution is the notion of bias that the Fed used to assume during its meetings. A bias indicated the FOMC's inclination to lower or raise interest rates at some point in the future. So while the FOMC might have chosen the path of inaction in some of its meetings, it might have decided to sound a cautionary note about its possible future decisions through its bias. The financial markets, being ever vigilant of the FOMC's possible decisions, often reacted quickly to such biases. But recently the Fed decided to abandon its strategy of announcing its bias in favor of issuing statements about how it views the economy; that is, whether the economy is showing signs of inflation or it is weakening in its opinion. These views still indicate to some degree the Fed's bias to lift, lower, or leave alone interest rates in the future.
As mentioned previously, the Fed's implementation of the Monetary Policy always directly affects the reserve levels, which are in turn are linked to the available supply of money or credit in the economy. And when supplies are altered, interest rates inevitably change in response, moving higher or lower and eventually settling at a target level intended by the Fed.
The interest rate maneuvering by the Fed is one of the most watched events by economists and investors alike given that interest rate levels are relatively a good measure of the economy's health. But even more importantly, forecasting the direction of the interest rates has long been a tradition among economists. The forecasting rules for interest rates are complex and take into account myriad pieces of data and many assumptions. But this goes even further (sometimes absurdly so) where, for example, the Fed chairman's every gesture is scrutinized over and over in order to gain an insight into Fed's stance on interest rates. There are usually more misses than hits with regards to the forecasts (i.e., the Fed takes a different path than anticipated) but for those who can …
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