The Role Interest Rates Play in the Economy

The Federal government controls aspects of the economy like interest rates, the amount of money in circulation and the inflation rate. Track these regularly as part of your fundamental analysis in the trading world. They serve as good indicators of the state of the economy and will help you determine how and when to trade and invest.

Interest Rates

  • The Federal Open Market Committee (FOMC)

The business press watch the FOMC like hawks. Any move or comment heard from it’s Board of Governors is used to speculate whether interest rates may be raised or lowered. They only meet 8 times a year so interest rate changes don’t occur that frequently. However, a change in the interest rate causes a big ripple on the economy.

For example, an increase in interest rates is likely to slow spending in an attempt to control inflation. On the other hand, a decrease in interest rates can increase spending. During a recession, people are more likely to borrow money and spend money when interest rates are low which serves to stimulate the economy.

  • The Beige Book

In addition to keeping your eye on the FOMC, it is advisable to read the “Beige Book.” Twelve Federal Reserve Banks compile this report used by the FOMC. It reviews the current economic conditions in each of the 12 districts through interviews with key business leaders, economists, and market experts. The FOMC uses this to assist them in developing monetary policies.

FOMC Current Press Release

The FOMC released this assessment of the economy in its December 2011 press release: “(T)he economy has been expanding moderately, notwithstanding some apparent slowing in global growth. While indicators point to some improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but business fixed investment appears to be increasing less rapidly and the housing sector remains depressed. Inflation has moderated since earlier in the year, and longer-term inflation expectations have remained stable.”

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In terms of interest rate decisions, the FOMC issued this statement: “The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.”

Keeping current with the decisions made by the FOMC and the Beige Book economic summaries will serve as relevant indicators for future investing.