Federal interest rate movements are watched very closely by various groups. Inve
ID: 1217942 • Letter: F
Question
Federal interest rate movements are watched very closely by various groups. Investors pay particular attention to interest rates and factor in the anticipated rate movement into their stock valuations. Therefore, if the interest rate change is different than expected, you will see many investors buying and selling stocks. If an interest rate cut is less than expected, more investors will sell their stocks at current prices and fewer will be willing to purchase at current prices. The combined effect would be to push overall prices lower. 1. Discuss why interest rate expectations are important in the financial markets. 2. Identify what the policy is of “transparency” the Fed is currently following. 3. Explain what transparency has to do with investor expectations.
Explanation / Answer
1. The interest rtae expaectations are important in the financial market because they determines bonds prices. Interest rate expectations also determines the level of consumption, privat einvestments and the level of debts in a economy. As private investment and consumption makes 85% of the GDP Interest rate expectations have an important role in GDP growth rate.
2. FED is currently following a "More data less gumption" policy of transperancy. They are taking more about the economic issues citing more datas and suggestion regarding that.
3. One of the prereuisite of free and effecient market is transperancy. Trough transperancy investors have ready access to financial information about a company, such as market depth, audited financial reports and price levels.
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