Importance of the Fed’s Beige Book for fixed income investors (Part 9 of 11)
The Beige Book is one of the primary data sources used by the Fed to determine monetary policy at Federal Open Market Committee (or FOMC) meetings. The Beige Book has been a key determinant of the direction of the Fed funds rate or the interest rate at which depository institutions trade funds amongst each other. These funds are balances held at the U.S. Federal Reserve. Since December 2008, the U.S. Federal Reserve’s target for the federal funds rate has been between 0%-0.25%.
The Fed has also stated that it will maintain the Fed funds rate between 0-0.25% until the economy’s twin goals of full employment and long-term inflation target in the 2% range are met. As inflation has remained persistently low and full employment in the economy has not been reached as yet, those goals are perceived to be relatively further off in the time horizon. Hence, the Fed funds rate is expected to remain in the above-mentioned range at least in the near term.
While the Fed funds rate is unlikely to change in the next FOMC meeting, markets will be eagerly watching signals from the Beige Book release that are likely to impact the Fed’s tapering of asset purchases. This would impact bond ETFs like BND, TLT, AGG, TLH, and IEF.
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