Page 35 - Ultimate Guide to Currency Trading

Regulating Economies: Sweden and the United States

Since most central banks have keeping price levels stable as one of their main goals, the banks will use
the same types of methods to regulate their home economies. There might be slight variations, such
as using a "repo-rate" to set the base interest rate of the country. Such a method is used in Sweden.
Looking at the Swedish central bank website under monetary policy,
(www.riksbank.com/templates/SectionStart.aspx?id=10602), they explain: "According to the Sveriges
Riksbank Act, the objective of monetary policy is to 'maintain price stability.'" The Riksbank has a
secondary goal of an inflation target: "The Riksbank's objective is to keep inflation around 2 percent
per year, as measured by the annual change in the consumer price index (CPI). In order to keep
inflation around 2 percent, the Riksbank adjusts its key interest rate, the repo rate."

In the United States, the goal is to keep the inflation rate in a range from 0 percent to 3
percent. The inflation rate in the United States is measured by the CPI. The CPI is a periodic
measurement of a predetermined basket of goods. The elements of the goods are measured against
the prices at the prior term, and any differences are noted. The result is a gauge of how much more it
costs for basic living expenses period to period.

It takes a bit of time for the actions of the Fed to work their way through the economic
system. If the Fed adjusts the money supply, the effects of the adjustment might not
reach the average household for several months. This delay is called forward-lag.

When the CPI comes out and it shows a large jump in the prices of basic goods, the central
bank of the United States—the Fed—takes notice. It will then react by a series of tactics such as selling
securities in open market operations, raising reserve requirements, or raising interest rates. Whatever
method the Fed uses, the result will be the same. The money supply will decrease, money to lend will
become harder to obtain, and the economy will begin to slow.

Reading the Economy

The time it takes to get a reading from the CPI and other indicators as to the heating up or cooling
down of the economy varies. Some say that it takes up to six months for the CPI and other indicators
to get a good reading of the economy. This is why you often hear "we are already in a recession" or
"the recession is over" from the market commentators and famous fund managers who are
interviewed on news stations. These market experts are reading the market and looking at their own
information. They are often privy to the temperature of the economy well before the official numbers
come out. If you hear the experts speak like this, take heed. They are usually quite right with their
observations.