The Best Monetary (Money) Indicators

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The Best Monetary (Money) Indicators

Money market indicators mirror general economic activity. I follow selected government and Federal Reserve Board measurements, including 10 indicators of the supply and demand for money and indicators of  interest rate levels.

History proves that the direction of the general market, as well as of several industry groups, is often affected by changes in interest rates. Because the level of interest rates is usually tied to Federal Reserve tightor- easy monetary policy, you may want to be aware of measures such as reserve requirements for member banks, the Ml and M2 money supply percent rate of change, federal funds rate, consumer price index, memberbank reserves, ratio of government securities holdings to bank loans, 90-day Treasury Bill yields, and U.S. Treasury Bond prices.

These monetary indicators might help you anticipate future government policy decisions and their effects on the stock market, individual stocks, and the American economy. Changes in 90-day Treasury Bill rates and the erratic and tricky Fed Funds rate sometimes help predict impending discount rate changes. The monetary base and the velocity of money are other important measures used by professionals. The Fed also watches economic data such as unemployment figures and Gross National Product (GNP) changes.

Don't be discouraged if the subject of monetary indicators seems complex; it is. Few economists, few presidents, virtually no one in Congress, and even few people at the Federal Reserve, including some heads of the Fed, understand it as well as they should. This is just one of the many reasons why the Fed should probably remain relatively independent and not subject to political control or extreme pressure from the Congress. It might, however, be constructive to let the term of office for the head of the Fed coincide with the presi- For the investor, the simplest and most relevant monetary indicator to follow and understand is the changes in the Federal Reserve Board discount rate. With the advent of program trading and various hedging devices, some funds use such techniques to hedge portions of their portfolio in an attempt to provide some downside protection during risky markets. The degree to which these are successful again depends greatly on skill and timing, but one possible effect for some managers may be to lessen the pressure to have to dump portfolio securities on the market.

More and more funds operate under a plan of very wide diversification and a fully or near fully invested policy at all times. This is because most managers have difficulty in getting out and into cash at the right time and, most importantly, then getting back in fast enough to participate in the initial powerful rebound off the ultimate bottom.