Like private market participants, the Federal Reserve is in the business of making policy judgments amid uncertainty and must assess the prospects for the real economy with considerable humility. What indicators might help us assess the economic and financial situation? We look to prices at which investors are willing to provide capital by reviewing risk premiums across a range of asset markets.
As an example, we monitor corporate credit spreads from bond, loan, and credit derivative markets, and we follow closely the evolution of pricing in mortgage markets. We also look to the terms by which market participants are willing to lock up funds over various time horizons by reviewing term premiums embedded in financial market prices.