SECTION 6: ECONOMY
90: What the Federal Reserve does. The Fed seeks to ensure the soundness of the banking system, stable prices and full employment. Among the Fed's most important tools are its power to influence the interest rate on overnight loans between banks and to increase or decrease the nation's money supply.
91: Why what the Fed does matters. The Fed influences the overall direction and level of interest rates. Low or falling rates are bullish for stocks. But if investors think the Fed plans to raise rates, they will often sell stocks because higher rates tend to slow the economy, hurting profits. When the Fed hinted in late January that it might start raising rates sooner rather than later, for instance, stocks recorded their biggest one-day loss in three months. Higher rates also make it more expensive for companies to borrow money to invest in new plants and equipment. And when rates are high, the potential advantage of owning stocks over bonds diminishes.
The four best indicators for tracking the economy
There's no way to foretell the U.S. economy's future with certainty. But by telling us how both consumers and businesses are faring, these four monthly gauges can suggest what might lie ahead. Follow these indicators and you'll be as well informed as many professional investors.
92: The Bureau of Labor Statistics employment report (available at bls.gov/ces), which tracks job creation.
93: The ISM Reports on Business (ism.ws), which take the pulse of the nation's industrial and service sectors by surveying executives in fields ranging from agriculture to retailing.
94: The Conference Board's Consumer Confidence Index (www.conference-board.org), which gives a sense of consumers' willingness to spend and thus spur economic growth.
95: The U.S. Leading Index (also from the Conference Board), a compilation of 10 economic indicators designed to predict how the economy will be behaving three months down the road.