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Federal Reserve Principal Economic Indicators


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Principal Economic Indicators Used By the Federal Reserve to Make Interest Rate Decisions

Federal Reserve Principal Economic Indicators

The United States Federal Reserve, commonly known as “The Fed”, uses four Federal Reserve Principal Economic Indicators to assess economic conditions in the United States.  The Principal Economic Indicators provide the Federal Reserve Governors an understanding of the state of the United States economy at the time the indicators were recorded.  The Governors on the Board of Federal Reserve use the Principal Economic Indicators as the primary data inputs they analyze to determine monetary policy at their periodic meetings, which are known as Federal Open Market Committee (FOMC) meetings.

Changes in United States monetary policy can have dramatic effects in both domestic United States stock markets and stock markets throughout the world.  Anyone who is serious about trading and investing in the stock market or any other asset classes can stay ahead of the curve by keeping an eye on the Principal Economic Indicators used by the Federal Reserve Governors to obtain clues as to what their next policy change may be.  The Federal Reserve Principal Economic Indicators are released on a regular basis on the Federal Reserve’s website.

The Federal Reserve Principal Economic Indicators include the following economic indicators:

  • Consumer Credit Report
  • Industrial Production and Capacity Utilization
  • Factors Affecting Reserve Balances
  • Money Stock Measures

Principal Economic Indicators – Consumer Credit Report

The Federal Reserve Consumer Credit Report is released on a monthly basis.  The report is comprised of data collected from numerous surveys sent to and filled out by financial institutions, retail sales companies, and other participants in the consumer credit markets.  The report uses the data collected from the surveys to estimate how much money has been loaned to individual creditors, both revolving credit (e.g., credit cards), and non-revolving credit (e.g., automobile loans).

In addition to gross consumer credit data, the report provides readings of average interest rates being charged by financial institutions for different types of consumer credit, such as credit cards and automobile loans, and the quality of the loans being made.

What Investors and Traders Need To Know About The Consumer Credit Report

Stock market investors and traders can obtain tradable information from the Consumer Credit Report, as the report provides a solid indication of how healthy United States consumer’s debt situation is, which can affect future consumer spending and economic growth, and subsequently stock prices.  Approximately 70% of the United States’ economic growth is fueled by consumer spending, so understanding the monthly Federal Reserve Consumer Credit Report can provide insight into future economic conditions and provide a basis for making investment and trading decisions.

Principal Economic Indicators – Industrial Production and Capacity Utilization

The monthly Industrial Production and Capacity Utilization Reports are released by the Federal Reserve at the same time.  Industrial Production includes goods produced by mines, factories, and electric utilities.   The Capacity Utilization rate is a measure of the current strength of the economy based on how much production capacity is being used by industry.  It is determined using the findings of the Industrial Production report.  Both reports reflect upon how quickly Gross Domestic Product (GDP) is growing.

What Investors and Traders Need To Know About The Industrial Production and Capacity Utilization Report

The Industrial Production and Capacity Utilization reports can be used by investors and traders to strength of United States economic growth.  These reports have become less important over the decades, as the United States has shifted from a manufacturing-based economy to a service-based economy.  However, their predictive ability regarding current growth and GDP in the United States makes them important for helping stock market traders and investors make investment decisions, based on growth prospects.

Principal Economic Indicators – Factors Affecting Reserve Balances

The Factors Affecting Reserve Balances Report is a weekly description of what factors are currently affecting the Federal Reserve balance sheet.  The factors included in the report are items such as currency in circulation, deposits at financial institutions, securities, loans, and gold reserves.

What Investors and Traders Need To Know About Factors Affecting Reserve Balances

Since the 2008-2009 financial crisis in the United States, stock market participants have paid close attention to the The Factors Affecting Reserve Balances Report, because it provides key information about Federal Reserve cash injection activity into United States financial markets, which has been a key driver of the considerable stock market rally that has occurred since 2009.  Stock traders and investors monitor this report for any signs that the Federal Reserve is cutting back on its cash injections, which will likely have a negative impact on the stock market, at least in the short term. 

Principal Economic Indicators – Money Stock Measures

The weekly Money Stock Measures Report by the Federal Reserve provides data regarding the current and past money supply in the United States.  Money supply statistics are provided based on the amount of liquidity of different money asset classes.  M1 money supply includes money that is readily available to spend.  M2 money supply includes M1 assets and money that is tied up in less liquid savings accounts and investment vehicles.

What Investors and Traders Need To Know About Money Stock Measures

The Money Stock Measures report is used by stock market traders and investors to understand how much money is currently available for spending versus how much is being spent, and whether liquid money supply is growing or contracting.  Growth in liquid money supply (M1) is an indication of a strong economy and cash available for consumers to spend, which likely will translate into stronger corporate profits and higher stock prices.

How Federal Board Reserve Decisions Affect The Markets

Federal Reserve
There are many factors that affect the stock market in the short and long term.  Federal Reserve decisions are undoubtedly one of the most import factors that affect the stock market in both the short and long term.  Any change in Federal Reserve policy can send the stock market sharply higher or lower in the short term, and can greatly affect long term stock market trends, as the Federal Reserve’s decisions affect both interest rates and economic growth, which impact stock market performance in a big way.

Analyzing and understanding the Federal Reserve Principal Economic Indicators can provide traders and investors a leg up in the stock market.  Using the data provided by these indicators, savvy traders and investors can make decisions that can help them stay one step ahead of the markets.  The old adage “Don’t Fight The Fed” is a very wise saying.

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