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Market experts and those well-versed in economic theory, along with politicians and pundits, like to muddle things up when it comes to interpreting data and formulating working summaries of economic activity. That's how they keep their jobs . . . by confusing the public when it comes to what's really happening with the economy.
But understanding how the economy works and making it fit your trading approach doesn't have to be that complicated. Simply stated, the United States economy, the largest in the world, is dependent upon a series of delicately intertwined relationships, so keep these factors in mind:
- Consumers drive the U.S. economy.
- Consumers need jobs to be able to buy things and keep the economy going.
- The ebb and flow between the degree of joblessness and full employment, how easy or difficult it is to get credit, and how much the supply of goods and services is in demand drive economic activity up or down.
As a rule, steady job growth, easy-enough credit, and a balance between supply and demand are what the Board of Governors of the Federal Reserve (the Fed) like to see in the economy. When one or more of these factors is out of kilter (teeters off balance), the Fed has to act by raising or lowering interest rates to either
- Tighten or loosen the consumer's ability to obtain credit.
- Rein in a too high of a level of joblessness.
- Increase or decrease the supply side to bring it in line with demand, or vice versa.
Each variable is monitored by individual government and private agencies that produce a key series of monthly and quarterly reports. These reports, in turn, are released on a regularly scheduled basis throughout the year. They provide futures-and-options traders with a major portion of the road map they need to decide which way the general-direction prices in their respective markets are headed. It's all about the government and private-agency reports and how the markets respond. Businesses are just the pawns of the Fed and the markets.
The overall focus of the markets is on only one thing . . . what the Federal Reserve is going to do to interest rates in response to the report(s) of the day. Based on how traders (buyers and sellers) perceive their markets before the Fed makes its move and their reactions after the Fed's response to economic conditions is announced, prices move in one direction or the other.
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