I want you to know that whether you are a beginner or an advanced trader, it is important to know what to look for and how certain reports may affect the price behavior of the markets. The figure below shows what I see as the major focuses of economic reports here in the United States and what is in my opinion the order of importance. My selection holds true in all business cycles. The number-one focus should always be to read and to listen to what the voting members of central banks are looking at and on what they are basing their decisions to adjust interest rates. That makes sense, right? So the releases of their FOMC meeting announcements are important, as well as the minutes of their last meeting. The minutes are released within two weeks of the last FOMC meeting. In Figure below, I have two small branches from the FOMC meetings: One is the Beige book; heighten your awareness of this, as it is released two weeks prior to a Fed meeting. The other is the Federal Reserve districts business surveys; these reports will show the underlying strength or weakness of everything from business credit conditions to the health of the consumer debt to income ratios.
Economic Report Reference Chart
You and I want to watch the reports and speaking engagements of the voting members of the FOMC. Generally, they will give clues as to what their intentions are and what their concerns are. One series of reports is the Fed’s Beige book, and the other reports are the individual Fed district business surveys, such as the Philadelphia Fed survey. Then we trickle down the flow chart reading from left to right and see the employment situation; in good times, we should see a low employment level with moderating wage costs. In hard times, we should see high unemployment rates. When times are good, as in the period through 2005 when the nation’s unemployment level was under 5 percent, we need to be aware of ugly inflationary pressures; so forex traders need to focus on these inflation reports, such as the Producer Price Index and the Consumer Price Index. After that, taking a look at the financial health of the consumers is key to determining the continued strength or weakness of the economy. After all, if they have no more spending cash or are maxed out on their credit cards, we can anticipate a downturn in the retail sector, right? If the consumer stops shopping for clothes, electronic products, home design products, cars, or appliances, which we consider durable goods, then that won’t be good for the economy and the Fed would be expected to stop raising interest rates or to possibly lower rates.
Here is a great example of why we want to pay attention to Fed speakers. When newly appointed Chairman Ben Bernanke took over, he had a private conversation with Maria Bartiromo, anchor of CNBC, one weekend. When she revealed his thoughts in an exclusive interview on national TV, the markets responded in such a way that Bernanke will be more selective in what he says and who he talks to at private functions! Once again, we need to follow the people who make the decisions, and we need to listen to and to read what drives their decision-making process for adjusting interest rates.
The Federal Open Market Committee consists of the seven governors of the Federal Reserve Board and five Federal Reserve Bank presidents. The FOMC meets eight times a year in order to determine the near-term direction of monetary policy. Changes are now announced immediately after FOMC meetings. There are a few accompanying statements the Fed may make after it announces any adjustments in interest rates. One statement is if the economy is at risk for economic weakness, or the other is if the economy is at risk for inflationary pressures. And there is always a chance for a neutral stance.
The Beige book is a combination of economic conditions from each of the 12 Federal Reserve regional districts. Truthfully, the report is aptly named the Beige book due to the color of its cover. This report is released usually two weeks before the monetary policy meetings of the FOMC. This report on economic conditions is used at FOMC meetings, where the Fed sets interest rate policy. These meetings occur roughly every six weeks. If the Beige book portrays an overheating economy or inflationary pressures, the Fed may be more inclined to raise interest rates in order to moderate the economic pace. Conversely, if the Beige book portrays economic difficulties or recessionary conditions, the Fed may see the need to lower interest rates in order to stimulate activity.