Impact on central banks and markets

- While children sometimes ask where babies come from, they're never going to ask you where do interest rates come from. But it's an important question. Not for babies, but for you. Interest rates come, in part, from central banks, like the US Federal Reserve, otherwise known as The Fed. And where does the data that drives their decisions come from? Yep, you guessed it, economic indicators and reports. In this video we'll talk about the data behind central bank decisions that impact interest rates, something that affects you and financial markets. Central banks implement policies that can impact every interest rate, from your short-term savings account to 30-year mortgage rates. You might have a mortgage, a car loan, or student loans. Higher interest rates make them all more expensive. Plus, some loans, like adjustable rate mortgages, actually adjust to changes in interest rates. This matters because higher interest rates on a mortgage means that you'll be paying less for the house and more for the debt. This also affects businesses that have lines of credit. When interest rates go up businesses have to pay more in interest fees. And if they need to pay more interest, they might decide to hire fewer people or they might need to lay off some people. Because businesses and individuals pay more when there are higher interest rates, increases in those rates can also send stock prices lower. But lower interest rates give businesses and individuals more money to spend, which means that lower interest rates can send stock prices higher. Let's say you own a moving company, and you need a loan to finance buying more moving trucks. You're going to buy fewer trucks if interest rates go up. Now I know what you're wondering. How do economic indicators fit into this whole interest rate thing? Why would your mortgage be going up? What could make your business loan be higher? Since central bank decisions can either make or break your day, you need to know what data they are looking at to make their decisions. It could help you figure out ahead of time what they might do. And the good news is that central banks really only have two top priorities, inflation, which is how much prices rise, and unemployment, which is how many people do not have jobs but want them. When business media folk talk about these two goals for The Fed for example, they call it the dual mandate. You may have heard this on Bloomberg or CNBC, and now you know, it's the balancing of these two priorities, inflation and unemployment. For the Fed these priorities are roughly equal in their importance, 50/50. For other central banks the priorities are different. For the European Central Bank, for example, inflation is more important than unemployment. But whatever the mix of priorities, central banks are all watching the economic indicators for inflation and jobs. Their goal is to have a low but stable level of inflation that makes business investments and investor returns predictable, while keeping as many people employed as possible. This is a tough balance to strike because inflation rises when the labor market is tight. But you don't want an economy with no inflation and a 10% unemployment rate, in the same way that you don't want an economy with 10% inflation and a 2% unemployment rate. There's a balance, which in the Unites States is a target of around 2% for inflation and 4% for unemployment. As you can see, interest rates and inflation are critical, and central bank views on these subjects matter a lot for markets. Fortunately, The Fed and other central banks also produce their own forecasts for future inflation, unemployment, and interest rates. Check out the link I've provided to The Fed's calendar that includes forecasts for all of these in the projection materials.