FEDERAL RESERVE BOARD POLICY

Activity

Rate

Reason

Fed Raises the Discount Rate

^

An increase in the borrowing rate for banks from the Fed usually results in increased rates for a bank's customers. This action is used to slow credit expansion.

Money Supply Increases

^

Excess money supply growth potentially can cause inflation and generate fears the Fed may tighten money growth by allowing the Fed funds rate to rise which, in turn, lowers Futures prices.

Fed does Repurchase Agreements

Fed puts money into banking system by purchasing collateral and agreeing to resell later. This helps bring rates down.

Fed does Reverses or Matched Sales

^

Fed takes money from the system by selling collateral and agreeing to repurchase same at later date. This decrease in money supply generally raises interest rates.

Fed Buys Bills

Fed permanently adds to banking system reserves which may cause interest rates to drop.

BUSINESS ACTIVITY

Activity

Rate

Reason

Consumer Price Index Rises

^

Indicates rising inflation.

Durable Goods Orders Rise

^

Pickup in business activity usually leads to increased credit demand.

Gross National Product Falls

Reflects a slowing economy. Fed may loosen money supply, prompting a decline in interest rates.

Housing Starts Rise

^

Shows growth in economy and increased credit demand. Fed less accommodating and may attempt tightening by allowing rates to rise.

Industrial Production Falls

Indicates slowing economic growth. Fed may be more accommodating by allowing interest rates to fall to stimulate the economy.

Inventories Up

Indicates slowing economy since sales are not keeping up with production.

Leading Indicators Up

^

Signals strength in the economy leading to greater credit demand.

Oil Prices Fall

Reduces upward pressure on interest rates, thereby enhancing prices of debt securities.

Personal Income Rises

^

The higher one's income the more is consumed prompting increased demand and higher prices for consumer goods.

Precious Metals Prices Fall

Reflects decreased inflation. Demand for inflation hedges abates.

Producer Price Index Rises

^

Indicates rising inflation. Demand for goods rises as well as prices. Investors require higher rates of return, pushing rates up.

Retail Sales Rise

^

Indicates stronger economic growth. Fed may have to tighten credit to slow economy.

Unemployment Rises

Indicates slow economic growth, Fed may ease credit, causing rates to drop.