Tag Archives | Federal Reserve

The Fed Beige Book

See Also:
Economic Indicators
Balance of Payments
Supply and Demand Elasticity
What are the Twin Deficits?

Federal Reserve Beige Book

The Fed beige book is more formally known as the “Summary of Commentary on Current Economic Conditions.” The beige book describes economic conditions in each of the twelve Federal Reserve Bank districts. The beige book is published eight times per year by the Federal Reserve Board. In addition, the reports are available to the public. The book is nicknamed the beige book because the cover is beige.

Federal Reserve District Banks

The Federal Reserve Board oversees the Federal Reserve System, which is the central bank of the United States. The twelve district banks are headquartered in Atlanta, Boston, Chicago, Cleveland, Dallas, Kansas City, Minneapolis, New York, Philadelphia, Richmond, San Francisco, and St. Louis.

What’s in the Beige Books?

The beige books summarize the economic conditions of the twelve Federal Reserve Bank districts. Furthermore, anecdotal evidence determines the economic conditions. As a result, Federal Reserve Bank officials meet with and interview economists, industry experts, and key business contacts and ask them for their perceptions of current economic conditions. They use the information garnered from these sources to compose the summary.

Each District Bank writes up its report, summarizing economic conditions by sector, and submits the summary to the district bank responsible for compiling the beige book. Responsibility for compiling the beige book rotates among all the district banks. The district bank responsible for compiling the beige book then summarizes the district economic conditions in a broader overall summary of economic conditions.

The summaries describe economic conditions in descriptive terms rather than with lots of numeric data and quantitative analysis.

What is the Beige Book For?

When the Federal Reserve Open Market Committee (FOMC) meets eight times per year to discuss and decide issues of U.S. monetary policy, such as raising or lowering the fed funds rate, they consider the information in the beige book as one of the sources of data in the process.

Beige Book 2008

To see the Federal Reserve beige book 2008 as well as older beige books, go to: federalreserve.gov.

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Fiat Money

See Also:
Cash Cycle
Categories of Banks
What are the 7 C’s of banking?
Currency Exchange Rates
Currency Swap

Fiat Money Definition

The definition of fiat money is currency made into legal tender. Furthermore, a governmental entity backs this tender to ensure its legitimacy.

Fiat Money Explained

Normally, fiat money is issued for a government or large grouping of countries. For example, the U.S. Federal Reserve issues dollar bills. When a person uses this, it is assumed that that particular bill has investment power because it is backed by the full faith and backing of the U.S. government. However, in Europe, the European Bank equivalent to the Federal Reserve issues euros to the local population. This process occurs all over the world for different countries and the money is only useful to a person in that particular country. If an American were to try to pay for a pack of gum in Brazil with a U.S. dollar bill, then he/she would be unsuccessful because in Brazil the dollar is of no use within the country of Brazil.

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Federal Funds Rate Definition

See Also:
Interest Rate Swaps
Interest Rate Definition
Interest Rate Risk
Prime Lending Rate
Libor versus Prime Rate
Interest Rate in Selecting Loan

Federal Funds Rate Definition

The federal funds rate definition, or fed funds rate, is the target interest rate for overnight lending and borrowing transactions between banks. The Federals Open-Market Committee (FOMC) sets the US fed funds rate. FOMC is a committee within the central bank of the United States. (For current and historic fed funds rates see the links below).

The fed funds rate is a macroeconomic indicator, closely watched by economists. It is also a central bank monetary policy tool used to influence the nation’s money supply. Use the rate as a reference rate for the US Prime Rate.

Commercial banks and other depository institutions maintain required reserves of capital at district Federal Reserve banks. Furthermore, the fed funds rate technically refers to the rate at which these institutions lend their Federal Reserve account balances to other institutions for short-term or overnight loans.

Federal Reserve Interest Rate Changes

The FOMC meets eight times per year – approximately every six weeks. At these meetings the committee discusses, among other things, the possibility of changing the fed funds rate. Additionally, the actual market rates may differ from the fed funds target rate. However, the target rate is set with the expectation that market rates will conform to the target rate.

The FOMC can lower the fed funds rate. This is typically done to stimulate the economy. The idea is that lower interest rates will encourage lending and borrowing and stimulate economic activity. Increased lending and borrowing also increases the nation’s money supply. Thus, an increased money supply can spur inflation.

The FOMC can increase the fed funds rate. They do this to reduce inflation or slow transactions growth. The idea is that higher interest rates will discourage lending and borrowing transactions. Less lending and borrowing can dampen economic growth. Therefore, this will reduce the money supply and reduce inflation.

Federal Open Market Committee

The Federal Open-Market Committee is a committee within the US Federal Reserve System, the US central bank. This committee is responsible for, among other things, setting the federal funds target rate.

Federal Funds Rate – Prime Rate

Use the fed funds rate as a reference for setting the US Prime Rate. The US Prime Rate is typically set at 300 basis points (or three percentage points) above the fed funds rate. For instance, if the fed funds rate is 2%, then the Prime Rate would be 5%.

Current Fed Funds Rate

To see the current and recent fed funds target interest rates, to go: www.bankrate.com.

Historic Fed Funds Rate

To see historic fed funds target interest rates, to go: www.newyorkfed.org.

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federal funds rate definition

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Basis Points

See Also:
Accounts Payable
Margin vs Markup
Collateralized Debt Obligations
Are You Collecting Business Data?

A basis point is one hundredth of a percentage point. A single basis point would look like this: 0.01%. Fifty basis points is a half a percentage point: 0.50%. 100 basis points equal one percentage point: 1.00%.

When To Use Basis Points

In finance, changes in the values of financial instruments or interest rates may be denoted in basis point. They are used to describe quantities less than one percent. When the Federal Reserve lowers its fed funds rate by a half a percent, the media may report that the fed funds rate was lowered by 50 basis points.

Similarly, the interest rate on a loan or debt instrument that is based on a reference rate, such as LIBOR or the Prime Rate, may have a spread quoted using the term basis point. The rate may be described as Prime Rate plus 50 basis point. If Prime Rate is 5%, then the rate on that loan or debt instrument would be 5.5%.

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Economic Drivers to Watch

Recently I heard Bill Sherrill speak regarding his economic forecast for 2013 and the economic drivers impacting that forecast. For those of you who don’t know Bill, he is the Founder of the Wolff Center for Entrepreneurship and twice appointed Governor of the U.S. Federal Reserve Board.

In his presentation, Mr. Sherrill presented the best explanations I have heard of the key economic drivers of the economy. According to him there are four key drivers of the economy.

Economic Drivers to Watch

The first is Fiscal Policy. Fiscal Policy is the federal government’s spending and taxation. According to Mr. Sherrill the trend to watch in 2013 is the impact of the Sequester. He predicts that the full impact of the sequester won’t be felt until the second half of 2013.

The second driver is Monetary Policy. Monetary Policy is the Federal Reserve Board. He expect the Federal Reserve Board to keep interest rates low until nationwide unemployment reaches less than 6.5%. That should not occur until mid-2013.

The third driver is the Financial Sector. That driver is primarily Wall Street and Wall Street is on a tear because of low interest rates.

Finally, the fourth driver is Main Street. Main Street is all about jobs. The trend to watch is the change in the number of jobs. It takes 100,000 new jobs each month to just keep up with the population growth; 300,000 new jobs per month would indicate a recovery in the economy and 500,000 new jobs per month would indicate a strong recovery.

Though Mr. Sherrill did not say how the economy would end up for the rest of 2013, he did tell us the four drivers to watch:

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Fed Lowers Rate Target – Time to Pop the Cork?

Yesterday afternoon, the Federal Open Market Committee did what nobody expected. The Fed lowers rate target. If you paid any attention to published reports, then they acknowledged what was already priced in by the futures markets and lowered its target for the federal funds rate by 50 basis points to 4.75%. While US equity markets reacted favorably to the news, with the Dow Jones Industrial Average, Nasdaq Composite, and S&P 500 indices all up on the news today, it is unclear as to whether this is a sign of good things to come, as the equity market reaction seems to suggest, or merely an attempt to forestall an inevitable slowdown of the US economy. The Fed, for its part, couched its change as a response to the current troubles. They have hit the credit markets, in particular mortgage lending:

“Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today’s action [intends] to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.”

FOMC Statement September 18, 2007

Fed Lowers Rate Target Conclusion

It certainly seems that the Fed is responding to pressure from the financial community. The financial community wants them to ease its monetary policy in the face of increasing difficulties in the credit markets. In addition, they want them to help those who recently financed their home purchase with an adjustable rate mortgage. Needless to say, this is probably not good news for the US dollar. As a result, the dollar continues to depreciate in value relative to other major currencies. After reading the FOMC statement, we realized there may be a rougher patch ahead.

Fed Lowers Rate Target

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