Fed Beige BookBy scorpion
Published: November 4, 2009
Data: Federal Reserve Bank
Release time: Two weeks before FOMC meeting
Frequency: Eight times in one year
Source: Federal Reserve Bank
A commonly used name for the Fed report entitled "Summary of Commentary on Current Economic Conditions by Federal Reserve District." It is published just before the Federal Open Market Committee (FOMC) meeting on interest rates and is used to inform the members on changes in the economy since the last meeting. The beige book generally consists of reports from bank and branch directors and interviews with key business contacts.
How important is it?
The federal open market committee is a key player in decisions concerning monetary policies that generally play a major role in shaping the direction of the economy. Since most of the other Federal Reserve Bank documentations such as the green book that contains the FRB staff forecasts of the U.S. economy and the blue book presenting the board staff's analysis of monetary policy alternatives are not publicized, the investing public only has the beige book to rely on. Since the beige book is released approximately two weeks prior to the FOMC meeting, investors can have an insight into the (FOMC)’s likely direction on events. It is the only accurate source of data that can help investors in projecting changes that may be made on monetary policies such as short-term interest rates among others.
How is it computed?
The beige book summarizes information consisting of reports from bank and branch directors and interviews with key business contacts, economists, market experts, and other sources according to district and sector. This information is collected from all Federal Reserve banks across the U.S, then compiled and submitted to the FOMC for analysis.
How does it affect the forex trade?
The FRB beige book contains highlights on the economic activities in the states within the period of survey. These trends are then used to adjust monetary policies in the short term. If the statistics indicate unprecedented changes in the economic environment, the FOMC might make equally drastic changes on the short-term interest rates. The investors’ reaction may be similarly dramatic leading to sudden changes in the volume of import and export trade; the ripple effect may rebound on the country’s forex reserves either positively or negatively depending on the perception created by the changes. If the changes send a negative signal and investors react by withdrawing their holdings, production may decline leading to a fall in export business that contributes a good fraction of foreign currency into the U.S.
Although forex rates are not greatly affected by the change in short term interest rates, the interest rates usually act as incentives to increase economic activity during moments when the economy seem to be slowing or to reduce money flow when inflation is imminent; the rates will influence an increase or reduction in production or the general economic atmosphere. Since the consumer and production activity are the greatest contributors to the monetary activity, anything affecting the two will end up affecting the forex rates either directly or indirectly.
How does it affect the stock market?
The stock market will always react to any monetary policy changes. If the FRB beige book hints at a likely change in interest rates either in the long or short-term basis, investors must strategize to counter the effect of the changes. In essence, the statistics are released to give an insight into the activity of the economy at any given time with the sole objective of influencing the economic landscape. This same objective also drives the FED to change interest rates. Since the investors at the stock market are out to make profits, any thing that affects the ability to generate more profits must lead to reactions from the investment fraternity. If the changes made are poised to make investors gain more in certain sectors, they will not hesitate to shift their holdings to the sector. Such moves always lead to rises and falls in prices of certain shares depending on their demands.
The Federal Reserve has a measure of control over the money supply aggregates, which differentiates this indicator from most others. Through open market operations such as buying and selling Treasuries and setting the reserve requirements, the Fed does things to alter the money supply through its daily course of business. Setting short-term interest rates to guide the economy remains the core policy directive of the FOMC. This policy changes continually sway the investors into sectors that are market friendly thus leading to stock market rates changes in the particular holdings.- 2758 Views
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