Federal Reserve Economic Data

Today’s post explains the relationship between interest rates and exchange rates and how they’re involved in investment decisions.

The data

The FRED graph above tracks two rates:

• The solid red line shows the exchange rate between the US dollar and euro.
• The dashed blue line shows the difference in interest rates (or yields) between the long-term/10-year US Treasury bond and the German government bond.

We can see in the graph that these rates appear to be related: When this interest rate differential (US bond yield minus German bond yield) has increased, the US dollar has tended to appreciate.

But exchange rates are affected by many factors, especially shocks that alter market views about the long-run future exchange rate. Such a shock appears to have occurred after April 2, 2025 (a.k.a., “Liberation Day”).

The graph shows that, at the time, US Treasury yields rose sharply relative to German government bond yields. In theory, that would have implied a stronger US dollar. But instead, the dollar depreciated. Market participants seem to have revised down their expectations of the dollar’s long-run value, possibly due to concerns that large tariffs would erode US economic fundamentals.*

For a deeper look, read on…

Investing decisions

Economists see a tight link between these interest rate differentials across countries and the expected changes in the exchange rates. So, in theory, investing in domestic bonds or foreign bonds should yield roughly the same rate of return. Again, when the interest rate differential (US bond minus German bond) increases, the US dollar tends to appreciate. This pattern supports the validity of the economic concept known as uncovered interest parity, or UIP. UIP states that

Domestic interest rate ≈ Foreign interest rate + Expected depreciation of the foreign currency

or

Expected change in the exchange rate ≈ Interest rate difference between the home and foreign countries

Bond yields in both the home and foreign countries are known at the time of investment and therefore they involve little uncertainty. But exchange rates are another matter.

Investors in foreign bonds must first convert their funds into the foreign currency to buy those foreign bonds. Then they must convert their funds back to the domestic currency once the foreign bond matures. The future exchange rate isn’t known at the time of investment, so the return from investing abroad is uncertain because of that exchange rate risk.

Long-run theory versus short-run observations

These patterns still support the validity of a long-run UIP through a mechanism in which today’s exchange rate adjusts to maintain parity, rather than through a shift in the long-run average exchange rate. But empirical evidence shows that, in the short run, exchange rates are nearly unpredictable and behave close to a random walk. This suggests that UIP doesn’t hold in the short run.

The data support UIP much better in the long run. Over longer horizons, exchange rates tend to revert to the mean. When there’s an increase in the interest rate differential between the home and foreign countries, today’s exchange rate should appreciate immediately in the higher-interest-rate country so that the expected exchange rate depreciates in the future as it swings back toward its long-run average. In other words, long-run UIP can hold through an exchange rate adjustment occurring today, rather than through changes in the long-run average exchange rate.

Consider this example: Suppose the long-term domestic interest rate remains unchanged at 5%, while the foreign long-term interest rate suddenly falls from 4% to 3%. Long-run UIP implies that investing abroad should still yield roughly a 5% return on average, despite the lower foreign interest rate. The 1- percentage-point reduction in the foreign interest rate should therefore be compensated by an expected appreciation of the foreign currency of about 1% annually. To achieve this, the domestic currency must appreciate immediately, so that it is subsequently expected to depreciate as the exchange rate converges back to its long-run average.

*See Jiang et al. (2025).

How this graph was created: Search FRED for and select the US Dollars to Euro Spot Exchange Rate (DEXUSEU) series. Click on “Edit Graph”: Under the “Edit Line” tab, modify the frequency to monthly and scroll down to the formula box and enter 1/a. Thus, instead of a USD/EURO exchange rate we have a EURO/USD exchange rate. Next click on “Add Line” and enter DGS10 to add the yield for 10-year US government bonds. Modify the frequency to monthly. Under “Customize data,” add the series IRLTLT01DEM156N, which is the 10-year German government treasury bond yields. Change the formula to a-b. From the “Format” tab, under line 1, click customize and change the color to red. Under line 2, click customize and change the color to blue and place the axis on the right. Finally, edit the dates so that the series starts on January 1, 2024.

Suggested by YiLi Chien and Kevin Bloodworth.

The title of this post may have reminded you that you need to buy some chocolate for some event in a couple of days. If you do, you may also notice that chocolate has become quite expensive. If you already made the trip, you may have bought less than usual or switched to some other sweet product. Either way, let’s look at the price of chocolate.

First, let’s be clear that chocolate has indeed become more expensive. Our FRED graph above shows the evolution of two types of candy: those with cacao-based chocolate and those without. The prices of both types have increased lately, but it’s very clear that chocolate and its derivatives have become significantly more expensive.

Why? The main ingredient of chocolate is cacao. (Cocoa is the term for its roasted form.) Its cultivation is concentrated in a few countries for climatic reasons, and it’s not produced domestically in the US. Cacao crops have been particularly bad in the past couple of years.

• Because of climate changes, current cacao trees aren’t optimal for their location.
• New trees take a while to grow and take 3 to 4 years to bear fruit.
• A virus is afflicting current plantations.

This lack of cacao supply has led to a marked increase in the world price for this commodity, as seen in our FRED graph below.

From a US perspective, do tariffs enter into the picture? The US imposed “reciprocal” tariffs on cacao-producing countries in February 2025, typically 15%. But these tariffs and some for other commodities that cannot be grown in the US were removed in November 2025. Thus, tariffs shouldn’t be a factor for this year’s Valentine purchase unless your purchase isn’t that fresh.

How these graphs were created: Search FRED for “Chocolate products” and select the right series. Click on “Edit Graph” then on the “Add Line” tab. Search for non-chocolate and select the right series. Click on the “Edit Lines” tab and select units “Index (Scale value to 100…)” with date 2011-12-01 and click on “Copy to all.” Open the “Format” tab, change the color of the first line to brown and the frame to pink. Finally start the graph on 2011-12-01. For the second graph, just search for “cocoa world price.”

Suggested by Christian Zimmermann.

FRED recently added 7 data series about the business conditions and outlook of upstream oil and gas energy firms headquartered in the 11th Federal Reserve District.

In industry lingo, upstream refers to oil and gas exploration and production and the related services that support those activities. Geographically, the 11th District of the Federal Reserve consists of Texas, northern Louisiana, and southern New Mexico. The regional Reserve Bank in the 11th District is in Dallas, Texas, so the dataset itself is called the Dallas Fed Energy Survey.

The FRED graph above shows the three broadest indicators of business conditions captured by the survey:

• level of business activity (solid blue line)
• company outlook (dashed green line)
• uncertainty (dashed orange line)

The data are reported as diffusion indexes. You can read about another example of this type of index here. In short: The direction of change in the value of the index indicates rising or falling values of the underlying concept being assessed.

What do the indexes show?

The indexes of company outlook and level of business activity generally move in the same direction and at the same time. Between Q3 2024 and Q3 2025 (the last four observations available at the time of this writing), those indexes ranged between 7.1 and -17.6. That suggests relatively stable outlook and activity conditions. However, the index measuring uncertainty was above 40 during most of that time. This is noteworthy because, since 2016, when data are first available, the uncertainty index generally moved in the opposite direction of the indexes of business activity and company outlook. Perhaps that could be expected because oil and gas exploration and production activities are large scale and expensive operations that take many years to plan and execute. In short: Uncertainty undermines this industry.

How this graph was created: Search FRED for and select “Dallas Fed Energy Survey – Level of Business Activity.” Click on the “Edit Graph” button and select the “Add Line” tab to search for “Dallas Fed Energy Survey – Company Outlook.” Don’t forget to click on “Add data series.” Repeat the last two steps to search for and add “Dallas Fed Energy Survey – Uncertainty.”

Suggested by Diego Mendez-Carbajo.