Money & Markets Dashboard

Understanding Money & Market Indicators

Why do interest rates matter for investors?

Interest rates are the price of money and arguably the most important variable in finance. They affect virtually every investment decision because:

• Bond values - Bond prices move inversely to yields. Rising rates cause bond prices to fall, and vice versa
• Stock valuations - Higher rates reduce the present value of future earnings, compressing P/E multiples
• Economic activity - Higher rates slow borrowing and spending, cooling the economy. Lower rates stimulate growth
• Dollar strength - Higher US rates attract foreign capital, strengthening the dollar
• Credit conditions - Rates determine borrowing costs for consumers and businesses

The Federal Reserve controls short-term rates (Fed Funds Rate) directly, while longer-term rates (2-Year, 10-Year Treasuries) reflect market expectations for future Fed policy, inflation, and growth. Understanding the relationship between these rates reveals the market's economic outlook.

What is the Federal Funds Rate?

The Federal Funds Effective Rate is the interest rate at which banks lend reserves to each other overnight. It's the Fed's primary policy tool and serves as the benchmark for all other interest rates in the economy.

How the Fed Funds Rate works: The Federal Reserve sets a target range for the Fed Funds Rate (e.g., 5.00%-5.25%). The Fed conducts open market operations to keep the actual effective rate within this range. When the Fed raises the target, it's tightening monetary policy to slow the economy and combat inflation. When it cuts the target, it's easing policy to stimulate growth.

Interpreting Fed Funds levels:

• Above 4-5% - Restrictive policy. Fed actively trying to slow economy and reduce inflation. Headwind for stocks, particularly growth stocks
• 2-4% - Neutral policy. Not particularly stimulating or restrictive. Rates near "normal" long-run levels
• Below 2% - Accommodative policy. Fed supporting growth. Generally supportive for risk assets
• Near 0% - Emergency easing. Fed in maximum stimulus mode (recession response or crisis management)

Watch the direction and pace: The path of rate changes matters as much as the level. Rapid rate hikes (25-50 basis points per meeting) signal Fed urgency about inflation and often pressure stocks. Rate cuts signal economic weakness or Fed pivot, often bullish for bonds and eventually stocks. The Fed typically moves in cycles—hiking until something breaks, then cutting to support the economy.

For investors: Rising Fed Funds Rate creates headwinds for stocks (higher discount rates) and is negative for bonds (yields rise, prices fall). Falling Fed Funds Rate is typically bullish for bonds immediately and stocks with a lag. The first rate cut after a hiking cycle often signals the start of a new bull market, though sometimes preceded by recession.

What do Treasury yields tell me?

Treasury yields are the interest rates on US government bonds. The 10-Year Treasury is the global benchmark for long-term interest rates, while the 2-Year Treasury is more sensitive to near-term Fed policy expectations.

10-Year Treasury Yield: Reflects market expectations for average short-term rates, inflation, and growth over the next decade, plus a term premium for duration risk. The 10-Year is used to:

• Price mortgages, corporate bonds, and long-term loans
• Value stocks (via discounting future cash flows)
• Signal long-term economic and inflation outlook
• Serve as the "risk-free rate" in finance models

2-Year Treasury Yield: Closely tracks Fed Funds Rate expectations over the next 1-2 years. When traders expect Fed rate hikes, 2-Year yields rise. When they expect cuts, 2-Year yields fall. The 2-Year is more volatile and policy-sensitive than the 10-Year.

Interpreting yield levels:

• Rising yields - Indicates stronger growth expectations, higher inflation expectations, or Fed tightening. Negative for bonds, often pressures stocks (especially growth/tech)
• Falling yields - Signals growth concerns, falling inflation expectations, or Fed easing expectations. Positive for bonds, eventually supports stocks
• High absolute yields (5%+) - Attractive returns in "risk-free" assets. Creates competition for stocks ("TINA" - There Is No Alternative - becomes less relevant)
• Low yields (below 2%) - Pushes investors into riskier assets seeking returns. Supports stock valuations

For investors: The 10-Year yield is critical for stock valuations. When 10-Year yields spike rapidly (e.g., from 3% to 5%), it compresses P/E multiples and pressures stocks, especially growth stocks with cash flows far in the future. Falling 10-Year yields support higher valuations. The 2-Year yield tells you what the market expects the Fed to do—compare it to current Fed Funds to see if rate hikes or cuts are priced in.

What is the Yield Spread and why does it predict recessions?

The Yield Spread (10-Year - 2-Year) is the difference between 10-Year and 2-Year Treasury yields. It's one of the most reliable recession indicators in economics.

Normal yield curve (positive spread): Normally, the 10-Year yield is higher than the 2-Year yield (positive spread, typically 0.5% to 2%). Investors demand higher yields to lock up money for longer periods (term premium). A positive spread signals healthy economic conditions—growth and inflation expected to continue, Fed policy appropriate.

Inverted yield curve (negative spread): When the 2-Year yield exceeds the 10-Year yield, the curve is inverted (negative spread). This is highly unusual and has preceded every US recession since 1970. Why does inversion predict recession?

• Fed overtightening signal - Inversion typically occurs when the Fed has raised short-term rates (2-Year) so much that it will cause an economic slowdown, forcing eventual rate cuts (pulling down long-term expectations)
• Growth pessimism - Investors expect near-term weakness (high 2-Year yields due to Fed hikes) but lower future rates (low 10-Year yields as Fed will cut in response to recession)
• Self-fulfilling - Inversion tightens credit conditions as banks' lending becomes less profitable, amplifying the slowdown

Interpreting the spread:

• Above +1% - Steep curve. Strong growth and inflation expected. Fed may need to tighten. Early/mid expansion phase
• +0.25% to +1% - Normal curve. Healthy, balanced outlook. Typical mid-cycle conditions
• 0% to +0.25% - Flat curve. Growth slowing, Fed may be near peak rates. Late cycle warning
• Below 0% (inverted) - Recession warning. Historically, recession follows within 6-18 months of inversion

Important nuances: Inversion predicts recession, but timing is variable (6-24 months). The inversion itself doesn't cause recession—it's a symptom of Fed overtightening. Once inverted, watch for un-inversion (steepening back to positive) as the Fed starts cutting rates—this often coincides with actual recession onset. The yield curve doesn't predict the severity or duration of recession, just that one is likely coming.

For investors: Yield curve inversion is a major sell signal for cyclical stocks and a warning to reduce risk exposure. However, stocks can rally for months after initial inversion before recession hits. Un-inversion and Fed cuts often mark the worst point for stocks (peak fear) but also the best buying opportunity for long-term investors. Watch credit spreads alongside the yield curve for confirmation of stress.

What is M2 Money Supply and why does it matter?

M2 Money Stock is a broad measure of the money supply, including:

• Currency in circulation (cash)
• Checking accounts (demand deposits)
• Savings accounts
• Money market funds
• Small time deposits

M2 represents the money readily available for spending and investment. Changes in M2 affect inflation, asset prices, and economic activity.

How M2 drives markets and inflation:

• More money → more spending - Rapid M2 growth puts more dollars in the economy, boosting spending and potentially inflation
• Asset price inflation - Excess money chases assets (stocks, real estate, commodities), pushing up prices
• Fed policy transmission - The Fed influences M2 through interest rates and quantitative easing/tightening
• Velocity matters - M2 growth only drives inflation if money velocity (turnover) is stable. During crises, money can pile up unused

Interpreting M2 trends:

• Rapid growth (10%+ annually) - Very loose monetary conditions. Can fuel inflation and asset bubbles. Seen during COVID (20%+ growth)
• Moderate growth (4-6% annually) - Healthy money supply growth in line with nominal GDP growth
• Slow growth (0-4% annually) - Tighter monetary conditions. Can slow inflation but also growth
• Contraction (negative growth) - Rare and concerning. Signals very tight policy or credit contraction. Deflationary risk

Historical context: The Fed massively expanded M2 during COVID (stimulus and QE), growing M2 from $15T to $22T in two years. This excess money contributed to 2021-2022 inflation. The Fed then tightened, causing M2 to contract for the first time since the Great Depression—a major disinflationary force.

For investors: Rapid M2 growth is bullish for risk assets (stocks, crypto, real estate) and warns of future inflation. M2 contraction is deflationary and typically negative for risk assets initially, but can set up for strong future rallies once Fed pivots. Compare M2 growth to nominal GDP growth—when M2 grows much faster, excess liquidity fuels asset price gains and inflation risk.

What does Consumer Credit tell me?

Total Consumer Credit Outstanding measures the total amount of debt owed by consumers, including:

• Auto loans
• Credit card debt
• Student loans
• Other personal loans (excludes mortgages)

Consumer credit levels signal consumer financial health, spending capacity, and credit conditions.

Interpreting consumer credit:

• Rising credit - Consumers borrowing to spend. Can support near-term consumption and growth. But also increases debt burden and financial fragility
• Stable credit - Consumers managing debt levels. Balanced household finances
• Falling credit - Consumers paying down debt (deleveraging). Can signal caution, reduced spending, or tight credit availability

Context is critical:

• Early expansion - Rising credit is healthy (confidence returning, credit available)
• Late expansion - Rising credit is concerning (consumers overleveraged, living beyond means)
• Recession - Falling credit signals stress (defaults rising, credit unavailable, consumers forced to deleverage)
• Early recovery - Falling credit is healthy (balance sheet repair, building foundation for future growth)

Watch credit growth vs. income growth: If consumer credit grows faster than incomes, consumers are increasingly reliant on debt to maintain spending—unsustainable and risky. If credit grows in line with or slower than incomes, debt levels are manageable.

Credit card debt is especially revealing: Credit card balances are more discretionary than auto/student loans. Rapid credit card growth late in the cycle often signals consumers stretching to maintain lifestyles despite stagnant incomes—a warning sign. Rising credit card delinquencies amplify the concern.

For investors: Rapid consumer credit growth late in economic expansion warns of overleveraged consumers and potential spending pullback (bad for consumer discretionary stocks). Falling credit during expansion may signal consumer caution despite strong economy (defensive positioning warranted). Rising credit with rising delinquencies is a major red flag for recession and consumer lenders.

What is the Trade-Weighted Dollar Index?

The Trade-Weighted US Dollar Index (Broad) measures the value of the US dollar against a basket of major trading partner currencies, weighted by trade volumes. It's the most comprehensive measure of dollar strength.

Why the dollar matters:

• US multinationals - A strong dollar hurts US exporters (products more expensive abroad) and reduces overseas earnings when converted back to dollars
• Commodities - Most commodities are priced in dollars. A strong dollar makes commodities more expensive in local currencies, reducing demand and pressuring prices
• Emerging markets - Many EM countries have dollar-denominated debt. A strong dollar makes this debt more expensive to service, causing EM stress
• Inflation - A strong dollar makes imports cheaper, helping to reduce US inflation
• Global liquidity - The dollar is the global reserve currency. A strong dollar tightens global financial conditions

What drives the dollar:

• Interest rate differentials - Higher US rates vs. foreign rates attract capital to the dollar
• Growth differentials - Stronger US growth vs. global growth supports the dollar
• Risk sentiment - The dollar strengthens during crises as investors flee to safety
• Fed policy - Hawkish Fed → strong dollar. Dovish Fed → weak dollar

Interpreting dollar movements:

• Rising dollar - Higher US rates, stronger US growth, or risk-off environment. Headwind for commodities, EM, and US multinationals. Helps reduce US inflation
• Falling dollar - Lower US rates, stronger global growth, or risk-on environment. Tailwind for commodities, EM, and US exporters. Can add to US inflation
• Dollar spike - Sudden dollar strength often signals global stress or crisis. Flight to safety. Tightens global financial conditions dramatically
• Sustained strength (above 120) - Very strong dollar creates headwinds for global economy and US multinationals

For investors: A strong dollar is negative for commodity stocks, emerging market stocks, and US large-cap multinationals (especially tech giants with global revenue). It's positive for US domestic companies and importers. A weak dollar is the opposite. Watch the dollar for early warning of global stress—rapid dollar spikes precede crises. Commodity investors should especially track the dollar—it has an inverse relationship with commodity prices.

How do I use these indicators together?

Monetary conditions shape the entire investment landscape. Combine these indicators to understand the Fed's policy stance and market dynamics:

Tight monetary conditions (challenging for stocks): High/rising Fed Funds Rate, high/rising Treasury yields, inverted yield curve, contracting M2, slow consumer credit growth, strong dollar. This environment typically pressures risk assets, especially growth stocks. Favor bonds, value stocks, and defensive sectors.

Loose monetary conditions (supportive for stocks): Low/falling Fed Funds Rate, low/falling Treasury yields, steep yield curve, rapid M2 growth, rising consumer credit, weak dollar. This environment supports risk assets. Growth stocks, cyclicals, commodities, and emerging markets typically outperform.

Policy transition (volatile, opportunities): Fed pivoting from hikes to cuts (or vice versa), yield curve moving from inversion to steepening, M2 growth shifting. Transitions create volatility but also major opportunities. The Fed's first cut after hiking often marks the start of a new bull market, though sometimes preceded by recession.

Key relationships to watch:

• Fed Funds vs. 2-Year - If 2-Year is well above Fed Funds, market expects rate hikes. If below, expects cuts
• 2-Year vs. 10-Year - Spread predicts recession. Also shows market's confidence in Fed achieving soft landing
• M2 vs. Fed Funds - Fed tightening but M2 still growing means loose conditions persist. Fed dovish but M2 contracting means conditions still tight
• Dollar vs. yields - Rising yields with rising dollar confirms tight policy. Rising yields with falling dollar suggests inflation concerns
• Consumer credit vs. Fed Funds - If Fed hiking but credit still growing, policy not yet biting. If Fed easing and credit falling, consumers in trouble despite low rates

Identifying regime shifts: The most important skill is spotting when monetary conditions shift from loose to tight (risk-off) or tight to loose (risk-on). Watch for:

• Fed pivot signals - Change in Fed rhetoric, pause in hiking/cutting cycle, shift in inflation/growth concerns
• Yield curve moves - Inversion → steep curve often marks Fed pivot and eventual market bottom
• M2 inflection - M2 growth accelerating or decelerating signals major liquidity shift
• Dollar reversals - Dollar peaking after sustained rally often coincides with global risk-on shift

Grades provide context: Each indicator is graded based on historical percentiles. For interest rates and monetary indicators, interpretation is nuanced—very low rates (high grades) can signal either healthy stimulus or economic crisis. Very high rates (low grades) can signal overheating or Fed overtightening. Use grades alongside economic context to determine whether current conditions are appropriate or concerning.