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Must-know: Interpreting FOMC statements

Part 2
Must-know: Interpreting FOMC statements (Part 2 of 4)

Must-know: Why these 3 indicators are all the Fed cares about

To understand Fed actions, investors need to look at the same data as the FOMC

Every month, the Fed releases a statement updating the markets on its views on the economy and its policies.

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Professional investors pore over these press releases, comparing the new wording to the prior month’s to glean any insight into potential changes in the Fed’s policies. The most recent statement mentions unemployment, household spending, business investment, housing, fiscal policy, and inflation as factors that the FOMC considers when setting policy.

The Fed’s “dual mandate” given by Congress is to set policy to maximize employment and control inflation. This means that the main indicators that drive Fed policy are the unemployment rate, the participation rate, and core CPI (consumer price index). Every investor should know these three figures.

These indicators are publicly available on the BLS website

Investors really have no excuse not to track this data. Not knowing the risks to your portfolio posed by future changes in monetary policy could lead to poor positioning and losses on investments. The unemployment rate, participation rate, and core CPI can be found on the Bureau of Labor Statistics website.

The other indicators mentioned in the press release are secondary to the Fed’s dual mandate. However, since the financial crisis, the Fed has become more concerned about its impact on markets and its role in the formation of “bubbles.” It’s possible that, going forward, the Fed will unofficially adopt a third mandate—to keep asset prices from rising too quickly during economic expansions. If so, investors should give some weight to housing prices and the stock market in inferring the Fed’s intentions.

The Fed is a political institution, so investors need to look at the decision-makers on the FOMC to get a full picture of what to expect out of future Fed policy. Read on to learn how to analyze Fed board members.

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