financial markets
The Federal Reserve monitors the overall health of financial markets as these markets are often a leading indicators of future economic conditions. For example, a declining stock market is often associated with the expectation of a decline in future earnings, which could potentially lead to high unemployment. The Federal Reserve also monitors market conditions of volatility and expectations. This section also includes the overall health of the banking system and the Fed's role as a regulator. Ensuring the proper controls are in place to avoid another crisis similar to the one in 2008 is a major goal of the Fed. The major issues to focus on when analyzing the financial markets are:
This list is a starting point and by no means exhaustive and can be expanded to include currency exchange rates, commodity prices or specific industry sectors depending on the argument being made and the support needed. As stated above, markets are often a leading indicator and the Fed monitors conditions to gauge expectations, but the Fed also monitors banking conditions to maintain stability in the system.
- Interest Rates, both real and nominal
- Current and past yield curves
- Stock market index (S&P 500, Russel 2000, etc.) prices
- Stock multiples (P/E, P/B, EV/EBITDA) in relation to historical levels
- Volatility (VIX)
- Cleveland Fed Financial Stress Index
- Banking health indicators (Monetary Policy Report, Stress Testing Reports, FDIC, etc.)
- Market expectations of interest rates
This list is a starting point and by no means exhaustive and can be expanded to include currency exchange rates, commodity prices or specific industry sectors depending on the argument being made and the support needed. As stated above, markets are often a leading indicator and the Fed monitors conditions to gauge expectations, but the Fed also monitors banking conditions to maintain stability in the system.
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Monetary policy the asset bubble
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Evaluating monetary policies, the housing bubble and implications
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