Time Frame: Long & Short Term
Category: Monetary

Description

Among investment professionals an old rule of thumb is, "Don't fight the Fed." Monetary policy has a profound effect on interest rates, the economy and the stock market. The discount rate is one of the most important tools of the Federal Reserve. As a result, movements in the discount rate are widely analyzed for insight into the future direction of Fed policy, the economy, interest rates and the stock market. A simple model can often identify when Fed moves are likely to significantly affect the stock market.

Calculation & Significant Levels

Discount Rate Model: A model based on a range of values from 3 to -3. The list below details how to change the model to accurately reflect the economy and stock market.

• When the Fed raises the discount rate subtract 1 (-1) from model.
• When the Fed raises the discount rate subtract 1 (-1) from model.
• When the Fed lowers discount rate add 1 (+1) to model.
• Every change is effective for 6 months after which the point is dropped from the model.
• When the Fed changes direction from raising rates to lowering rates, the model becomes a +2.
• When the Fed changes direction from lowering rates to raising rates, the model becomes a -2.

Gauge Elements: Magnitude, Time
Updated: Weekly (as of Friday close)

Strategy