How to Read Federal Reserve Reports to Guide Your Investment Decisions

Federal Reserve reports and research can guide investment decisions by providing useful economic data reflective of business, market , commercial and economic conditions. The U.S. Federal Reserve Bank or FED for short is the semi-private national central bank of the United States that both gathers and releases economic data. This data can be found at the Federal Reserve website, and the websites of the Federal Reserve Regional Banks.

Federal Reserve reports include a variety of financial and economic information related to the banking industry, the economy as a whole and aspects of the economy that help investors uncover investments insights, fundamental data, and economic patterns relevant to investment decision making.

Types of Federal Reserve reports

The types of Federal Reserve reports include key data such as current and historical statistical releases, survey data, spreadsheets, industrial manufacturing information, research on possible future economic scenarios, and emphasis on national banking research, records and analysis.

Federal Reserve reports may also provide pertinent information on banking legislation and policies that can have an impact on businesses and/or banks. Each Federal Reserve report contains information on different parts of the economy that specify recorded variables that can help guide an investment decision. For example Federal Reserve reports include numbers on economic activity, production, employment, cash flow which can tell a reader of the report what has happened to that aspect of the economy over time and/or for a particular time period.

This data can also be further analyzed via statistical software to establish additional economic relationships for investment purposes. Samples and examples of Federal Reserve reports to guide your investment decision are listed below:

• Industrial production and capacity utilization
• Consumer credit outstanding
• Aggregate reserves of depository institutions
• Economic analysis studies
• Banking practices involving customers
• Federal Reserve letters

Each Federal Reserve report covers an economic or banking topic that is relevant to investors because the information in the Federal Reserve reports may reveal trends, financial events, probabilities and forecasts that could serve as financial indicators. In other words and for example, the Federal Reserve report on industrial production in July through September 2009 indicates an increase of 2.8%.

The capacity utilization chart shows how much of the industrial sector’s productive ability is being used which may be important to investors interested in putting money in industry where manufacturing and capacity utilization have a pronounced affect on businesses. However, industrial production and capacity utilization reports may also demonstrate the overall economic climate which is also of relevance to investing.

How to read and understand Federal Reserve reports

Each U.S. Federal Reserve Bank report may have a different format, topic, and measurement methodology. For example, one report may be a written statement of a Federal Reserve requirement whereas another may be a spreadsheet of historical numbers. Understanding and reading Federal Reserve reports involves 1) knowing what you’re looking for, 2) reading the measurement technique used in the report if any, 3) assessing the usefulness and applicability of the report to a specific investment and 4) accurately interpreting the data in terms of the investment(s). This process may take some time and practice but is an essential aspect of investment research.

To illustrate the above steps, consider the example of Mr. Bacchus who is interested in investing in Bank of America but is not sure whether or not that is a good idea. As part of his investment research Mr. Bacchus decides to study Federal Reserve reports to help with his investment decision. He wants to find out 1) if the bank has good future earnings prospects, 2) what the business and regulatory climate in which the bank will operate is and 3) information on the banks customers in terms of cyclical economic trends.

To find out this items Mr. Bacchus visits the Surveys & Reports section of the Federal Reserve website in addition to the Banking information and regulation section. Within these sections he determines some reports are more useful than others and decides to read the latest Bank holding Performance Report for Bank of America Corporation. This report gives Mr. Bacchus a wealth of information in 27 pages with which he determines the data is mostly quantitative and includes financial statements, performance ratios, derivatives and off balance sheet transactions, loan data and more.

Mr. Bacchus has now achieved steps 1-3 and must now complete step 4 and accurately interpret the data. Mr. Bacchus decides to focus on Derivatives and Off-Balance Sheet Transactions. Bacchus discovers that off balance sheet loans made by the bank are the lowest level in 4 consecutive years, and interest rate swaps are the highest in 4 years.

From this information Mr. Bacchus determines Bank of America Corporation is heavily hedging against the performance of its non-swap revenue cash flow indicating the bank may fear inadequate performance of other banking products. Since off balance sheet loans are at a 4 year low this helps validate Mr. Bacchus’ belief and leads him to suspect the bank is pursuing a more conservative and defensive posture than aggressive growth approach.

Whether or not Mr. Bacchus’ interpretation is correct and how he applies his understanding of the report to his investment decision is Mr. Bacchus’ concern; what he has done however, is locate, obtain, distinguish and interpret a Federal Reserve report.