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.