Mgmt504: Microeconomics - Market Moving Indicators

MGMT 504 – MICROECONOMICS

ASSIGNMENT 11

Swathi Aare

April 20, 2015        

Market Moving Indicators: The FOMC Meeting Announcement and Retail Sales

The FOMC Meeting Announcement

1. A. Definition: The Federal Reserve’s policy making arm is known as Federal Open Market Committee which decides Fed Funds Rate, the rate which commercial banks charge between themselves for overnight loans when a bank has a shortfall of reserves. The FOMC also makes key decisions about the monetary policy of US. The FOMC announcement is the announcement of policy decision at the end of each meeting which also includes comments on the FOMC’s view about the economy and FOMC members voting on the policy decision.

B. Why investors care: The FOMC meeting announcement is important as it decides on the Fed Funds Rate which is important in deciding the overnight lending rate of all the commercial banks which in turn is the key to Treasury bond rates and mortgage rates, auto loans & credit card loans. Weeks before the announcement, investors speculate about the likelihood of change in the interest rate. If the FFR is different from the expectations, it effects the market as well as the key aspects of economy such as employment, inflation & growth.

C. Importance and Interpretation: Higher interest rate slow the economic activity and lower interest rates stimulate the economic activity. Higher interest rates decrease the consumer spending as home and car loans are available at higher rate. Similarly low interest rate increase consumer spending. Furthermore, high interest rates are a burden to businesses that have high debt load and business that borrow money to maintain high inventory levels. Higher interests rate directly affect the profits of companies.

The Fed also began quantitative easing for the recovery of economy from recession of 2008. This affected long-term interest rates, other financial sectors and the economy.

2. From the most recent FOMC meeting of March 18, 2015 the following can be interpreted:

A. Current values announced in the 3/18/2015 meeting are 0 to 0.25%

B. The current values of the indicator are in line with the consensus range.

C. Trends in the indicator over time: The Fed funds rate has varied widely over the years in response to prevailing economic conditions. While it was as high as 5.25% in Jan 2007, the rate has decreased steadily to a record low of 0 to 0.25%. The FOMC has maintained the range for the federal funds rate at a record low of 0% to 0.25%, from January 2009 onward, to combat the Recession of 2008-09 and stimulate the U.S. economy.

The fed funds target rate indicated in the graph reflects the monthly average. The graph does not indicate the most recent fed funds target rate announcement.

The graph also indicates the core PCE price index, which is more preferred by the Fed in policy making as core PCE index is more accurate than CPI in calculating the cost of living.
 

Retail Sales

1. A. Definition: Retail sales is an indicator that measures the total dollar value of merchandise and related services sold to consumers within the retail trade.  Retail sales include the sales of durables and nondurables. Companies of all sizes are included, from Wal-Mart to independent, small-town businesses.
   

B. Why investors care: Since consumer spending is two-thirds of the GDP and retail sales is half of consumer spending, retails sales is a key indicator of how the economy is performing. Retails sales indicator helps investors to make key decisions on which sector of consumer segment, the investment should be made without the need to look into particular company’s annual report.