Federal
Reserve
The
Federal Reserve's primary
function is to keep the economic
system in balance. The Federal
Reserve has three economic
controls to influence imbalances
like high inflation rates.
The Federal Reserve can: alter
the amount of reserve that
member banks are required
to maintain; control the discount
rate; and, the Federal Funds
rate.
During
a recession or slow economic
growth period, the Federal
Reserve will lower interest
rates to encourage investors
to move assets into stocks
and bonds (which will obviously
help the stock market). When
economic growth is too fast
and inflationary pressures
begin to build, the Federal
Reserve will raise interest
rates to encourage investors
to move assets into money
markets and CDs. This is the
Federal Reserve's preferred
method of economic control.
During
the 1990 recession, the Federal
Reserve dropped the rates
to the lowest rate in two
decades. In 1994, the economy
began to rebound and the Federal
Reserve raised the rate for
the first time since 1990.
This signaled the first potential
of a change in the trend of
the interest rate. Since then,
the Federal Reserve has raised
the rate 10 consecutive times
(as of August 2005) which
has quite conclusively made
an upward trending interest
rate. Even though the rate
changes were quite small,
it is the perception of the
public that the trend has
changed that put a bit of
a damper on the stock market.
Note:
A reasonable method for forecasting
interest rates is to look at the
Dow Jones Utility index. If the
index in trending upwards it indicates
that interest rates are trending
down, if the index is trending down,
it indicates that interest rates
are on the rise. Utility stocks
are considered sensitive to interest
rates and therefore make a good
leading indicator towards the interest
rate trend as well as the overall
market trend. (Some might argue
that other indexes work just as
well, however this depends on the
investor's strategy. Generally speaking
the utility index works well for
interest rates and for overall market
trend).
See Federal
Reserve Act of 1913
See Federal Reserve
Bank
See Federal Reserve
Board (FRB)
See Federal Reserve
System
Federal
Reserve Member Regulations
Regulation
A
Regulation D
Regulation FD
Regulation G
Regulation M
Regulation Q
Regulation U
Regulation T
