Interest Rates, Inflation, the Federal Reserve, Employment, Housing, and the US Dollar

Now that we have covered all of our basics, it is time to switch gears slightly and dive into monetary policy. In this second section we cover interest rates, inflation, the Federal Reserve, the job market, housing, and the US Dollar. These topics are crucial for a proper understanding of the macroeconomy,unfortunately, it is easy to get lost in a tsunami of information. For example, there are thousands of interest rates in the economy, when we talk about the interest rate which one do we pick? Similarly for inflation, how do we measure it and is there more than one way?

This section consists of six chapters. We start with Interest Rates and talk about the different typesinterest rates and how the Federal Reserve influences them. Then we settle to analyze Treasury yields, which are probably the most important rates for the market.

The second chapter of the section is about a topic closely related to interest rates: Inflation. We take a deep dive into how inflation is measured and show the two indexes commonly used to gauge it. We believe it is important to get into the weeds in this topic because it is not widely understood how we go from prices of individual products to an overall macroeconomic price index.

Then we delve into the Federal Reserve, in particular how it currently uses its balance sheet to conduct monetary policy. In this chapter we will analyze the massive growth in assets the Federal Reserve experienced after the global financial crisis, and how its mix has evolved.

In the final three chapters, we touch on topics that are heavily influenced by the Fed’s stance on monetary policy. Employment is the other half of the dual mandate of the Federal Reserve, which in turn impacts greatly the Housing and Exchange Rate markets.