The Federal Reserve
The Federal Reserve is the US central bank and is made up of 12 regional banks across the United States in major cities. The money kept at these banks are called federal funds. The US treasury also keeps a bank account with the federal reserve. In other words, US tax dollars are kept there. In addition, it is run independently by the presidentially appointed Federal Reserve Board (FRB), the partially presidentially appointed Federal Open Market Committee (FOMC) and numerous privately owned US member banks, and various advisory councils.
Gross Domestic Product (GDP)
The GDP is the measure of the value of goods and services an economy (country) actually produces per year. Most countries grow around 1 to 3% annually. This is arguably the most commonly used economic indicator, kind of like the ‘grandfather’ of economic figures. When we talk about economic growth, we are referring to GDP.
Inflation is best defined as gradual increases in the price of goods and services. As economies grow, naturally inflation tends to be a side effect. As an example, say you drive a truck for an fruit trucking company and gets a well-deserved raise. Your company needs to get the additional money to cover his raise from somewhere and increases their prices a tiny bit. All the apple farmers who use the same trucking company to move their produce will also now need to charge a tiny bit more to make up for the increase in logistic costs. This then may cause an increase in other products to match the slight increase in the cost of apples. Ultimately you, despite his pay rise, can only buy the same number of apples as he could before. It’s time to ask for another pay rise! This is inflation. This cycle of inflation happens constantly with a vast array of goods and services. A level of around 2 to 3% inflation is considered healthy and is actually encouraged in most countries.
Consumer Price Index (CPI)
Sometimes inflation can get out of hand, and some goods can become far too expensive, causing unintended effects across the economy. Therefore, there are agencies set up to record an economic indicator called the “Consumer Price Index”. This is a monthly measure of the cost of a standard basket of goods – the kinds of things the average American family purchases regularly. With the CPI, we can track the cost of goods to the average American family over time.
This figure represents the proportion of people who are currently looking for a job, but can’t find any work. The unemployment rate does not include those who have stopped looking for work. Generally speaking it doesn’t include homeless or undocumented people either, especially if they’re not actively looking for work. Unemployment is an important economic measure, as it shows the strength of the jobs market, and the availability of jobs.
Oil is essential in modern society. We use it to fuel all transport as well as much manufacturing. Oil from the ground is also used in many manufactured goods such as anything made from plastic. Oil prices change depending on demand and supply, and are heavily dependent on world events. The change in oil prices will directly affect transport, energy and manufacturing costs, and therefore directly affects the economy. The introduction of fracking (obtaining oil from underground rocks) in the US has led to a huge increase in onshore production, and has contributed to a reduction in oil prices. The US is now the largest producer of oil in the world, just ahead of Saudi Arabia.
Federal Funds Rate
This is the interest rate which banks charge each other. Banks lend to each other in overnight funds, and the rates they lend to each other at directly affect the rates consumers pay for their loans. This rate is strongly influenced by a committee at the Federal Reserve, the Federal Open Market Committee, who determine a target federal funds rate. The primary tool the Fed uses to meet this target is by controlling the discount rate (the interest rate at which banks can borrow from the Federal Reserve). It is often set higher than the target to encourage banks to borrow from each other, which causes them to adjust their interest rates, the federal funds rate, as a result.
Effective Federal Funds Rate (EFFR)
This is often used interchangeably with federal funds rate, but should not be mixed up with the target federal funds rate, which confusingly enough is sometimes used interchangeably with federal funds rate. Using the term, effective federal funds rate (EFFR) makes it clear you are talking about the actualized interest rate used between banks when lending overnight funds to each other. ultimately determined by the interbank market as they set interest rates for each other when lending overnight funds.
10 Year Note
This is a treasury note that matures in 10 years. A treasury note is a ‘debt obligation’ that can be purchased directly from the US Government. The US Government promises to pay back this loan with interest at the agreed interest rate. The money raised from selling this type of loan is used to fund Government spending, welfare, infrastructure etc. These notes can be traded amongst note-holders, and there is a secondary market attached. While you can purchase notes for different time periods (3 years, 5 years and even 30 years), the 10 year is the most commonly watched and commented on. This affects consumers who are considering purchasing a home. As the yield on the 10 year note rises, so do interest rates, meaning it becomes more expensive to pay the interest on a home loan. This may also affect home prices. It also directly correlates with the 10 year bond market, since the bond is the investment made by the lender of the 10 year note.
The growth of home prices is an important economic indicator, as this affects homeowners’ wealth, and ultimately how much people consume within the economy. It’s important to note that there are many other factors that come with home prices, such as the construction and homebuilding industries, as well as the infrastructure that comes with property market growth. Also, it’s important to monitor home prices alongside wages, as this may affect affordability for those planning on entering the property market.
The housing market is one of the pillars of any economy – the growth in new housing and the ability for Americans to purchase their own home is a crucial part of that. The housing starts figure measures the construction of new property. This data comes out monthly and shows building permits and construction data in the four major regions (Northeast, Midwest, South and West).
Nonfarm payroll is a monthly report generated by the Bureau of Labor Statistics intended to represent the total number of paid US workers of any business. The report excludes workers from general government jobs, private household jobs, employees of nonprofit organisations and farm employees. It comes outon the first Friday of the month and is used to assist the government policymakers and economists with determining the current state of the economy and predicting future levels of economic activity. The statistics from the nonfarm payroll show which sectors are generating the most employment additions.