A TUTORIAL ON FED WATCHINGThe idea of this lecture is to provide you with some resources that you can use to monitor FED policy. The objective ultimately is to obtain a guage of where interest rates may be heading in the future. There are several reasons why one should want to do this. Specifically in this course we have focussed on the impact of interest rate changes on the present discounted value (i.e. market value) of long-term debt and equity investments (CMIs or capital market instruments.) I have tried to emphaze throughout our time together my desire to put "meat on the bones" of the term systematic risk. Systematic risk is also referred to as market risk. It is the risk associated with any portfolio of financial investments regardless of well diversified that portfolio may be. In short, market risk is related to the fluctuations in the market value of portoflios due to changing macroeconomic conditions. This is part and parcel of what is referred to as "fundamental analysis". (See for example, Brian Kettell's What Drives Financial Markets? ) My emphasis in part reflects the move the finance profession has made away from the classic measure of systematic risk, "Betas", toward what are called arbitrage pricing models where macroeconomic factors are explicitly considered. (To learn more about these check out http://www.birr.com/)
As we all know, what the FED does is based on its reading of current economic conditions. The best single source of information AND ANALYSIS on the economy at large can be found at the Dismal Economist web site at http://www.economy.com/dismal. Although at one time, this site was free to anyone, it is now only available to subscribers. You might also like to check out the following two sites for current data: (2) The St Louis Fed's Economic data base: FRED Other webpages that provide some insight into where the economy is heading include the following two sites: Economic Cycle Research Institute and the Survey of Professional Forecasters maintained by the Philadelphia FED.
For current information on FED policy including a schedule of FOMC meetings and full transciptions of recent FOMC meeting notes you can (with a subscription) go to the interactive Wall Street Journal Fed Watching Site.
Too much for you? As we discuss in lecture today, there are several key markets that provide basically good information on the market consensus regarding the future direction of FED policy. Key among these is what is know as the Fed funds futures market. Current data on the price of these contracts can be found at http://quotes.ino.com/exchanges/?c=interest
. Check out the Power Point Presentation on interest rate futures contracts posted to the public folder for this class.
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