Fed Model

AAA

DEFINITION of 'Fed Model'

A model thought to be used by the Federal Reserve that hypothesizes a relationship between long-term Treasury notes and the market return of equities. Many security analysts use this model in valuing equities.

INVESTOPEDIA EXPLAINS 'Fed Model'

The Fed doesn't endorse this tool. In fact, it was named the "Fed model" by Prudential Securities strategist Ed Yardeni.

This model suggests that returns on 10-year Treasury notes should be similar to the S&P 500 earnings yield. Differences in these returns identify an overpriced or underpriced securities market.

RELATED TERMS
  1. Alan Greenspan

    The former chairman of the Board of Governors of the Federal ...
  2. Financial Modeling

    The process by which a firm constructs a financial representation ...
  3. Earnings Yield

    The earnings per share for the most recent 12-month period divided ...
  4. Standard & Poor's 500 Index - S&P ...

    An index of 500 stocks chosen for market size, liquidity and ...
  5. Federal Reserve Board - FRB

    The governing body of the Federal Reserve System. The seven members ...
  6. Treasury Note

    A marketable U.S. government debt security with a fixed interest ...
RELATED FAQS
  1. Why is the employment figure important to a "dove"

    The employment figure is important to doves, because they are primarily concerned with the health of the labor market. Doves ... Read Full Answer >>
  2. What are the Federal Reserve's guidelines on demand deposit accounts?

    Section 19 of the Federal Reserve Act of 1913 authorizes the Federal Reserve Board to impose reserve requirements on the ... Read Full Answer >>
  3. How can I use a regression to see the correlation between prices and interest rates?

    In statistics, regression analysis is a widely used technique to uncover relationships among variables and determine whether ... Read Full Answer >>
  4. What is each party's role in a reverse repurchase agreement?

    There are two principal parties in a reverse repurchase agreement. The first party, often called the seller, is offering ... Read Full Answer >>
  5. What are some of the major regulatory agencies responsible for overseeing financial ...

    There are a number of agencies assigned to regulate and oversee financial institutions and financial markets, including the ... Read Full Answer >>
  6. What are the main risks to the economy of a country that has implemented a policy ...

    The main risk to the economy of a country that has implemented a policy of austerity is the potential for a self-reinforcing, ... Read Full Answer >>
Related Articles
  1. Economics

    The Federal Reserve

    Few organizations can move the market like the Federal Reserve. As an investor, it's important to understand exactly what the Fed does and how it influences the economy.
  2. Economics

    Forces Behind Interest Rates

    Get a deeper understanding of the importance of interest rates and what makes them change.
  3. Bonds & Fixed Income

    Breaking Down The Fed Model

    Learn what pundits mean when they say that stocks are undervalued according to the Fed model.
  4. Economics

    Translating "Fed Speak" Into Plain English

    Confused by the Fed's lingo? Find out what it can tell you and learn how to decipher it.
  5. Bonds & Fixed Income

    6 Factors That Influence Exchange Rates

    Find out how a currency's relative value reflects a country's economic health and impacts your investment returns.
  6. Active Trading

    The Fed Model And Stock Valuation: What It Does And Does Not Tell Us

    Learn about this popular stock market valuation model and how accurate it has been over the years.
  7. Investing Basics

    S&P 500 Vs. Russell 2000 ETF: Which Should You Get?

    We look at the differences of investing in the S&P 500 vs. the Russell 2000 exchange-traded fund, and when to choose the one over the other.
  8. Trading Systems & Software

    The Fast-Paced World of Libor & Fixed Income Arbitrage

    LIBOR is an essential part of implementing the swap spread arbitrage strategy for fixed income arbitrage. Here is a step-by-step explanation of how it works.
  9. Economics

    Regional Banks Give The Fed A National Perspective

    We all know that the Federal Reserve utilizes monetary policy to control the economy, but what do the 12 regional Federal Reserve Banks do?
  10. Fundamental Analysis

    Spectator Vs. Speculator: Two Market Approaches

    Spectators and speculators rely on different mechanisms to identify and profit from market opportunities.

You May Also Like

Hot Definitions
  1. Radner Equilibrium

    A theory suggesting that if economic decision makers have unlimited computational capacity for choice among strategies, then ...
  2. Inbound Cash Flow

    Any currency that a company or individual receives through conducting a transaction with another party. Inbound cash flow ...
  3. Social Security

    A United States federal program of social insurance and benefits developed in 1935. The Social Security program's benefits ...
  4. American Dream

    The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version ...
  5. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  6. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!