11 Reasons Why Investors Need To Understand The Fed

Those interested in personal finance and investing, in particular, should have a working knowledge of what the Fed does, particularly if you are interested in all aspects of money and investing. The Fed influences our economy, our borrowing rates, our investments. They communicate with the public and add their voice of reason when our financial system is being threatened as it was during the Great Recession.

Chair  Powell signalled  upcoming Fed action in last few months of 2018. Specifically, he suggested the FOMC  may be raising the fed funds rate a few times in 2019. The fed funds rate is the overnite borrowing rate between commercial banks and is the primary means by which the Fed adjusts their stance in monetary policy.

Understanding The Fed’s Role

1) FOMC’s regular meetings are scheduled well in advance and made public. Individual FOMC members schedule speaking engagements and are watched very closely. Formally, the FOMC meets about eight times a year to determine monetary policy according to its dual goal mandate provided by Congress.

2) The Fed looks at all kinds of economic and inflation indicators. They will also look at the economy from different points of view, such as  demographics (eg. minority communities), or regionally(different parts of the country). They look at all of these indicators to better gauge where we are in the business cycle.

3)The Fed needs to know about external variables that they don’t directly control but could be impactful to our economy. The Fed  looks at important factors that could affect our economy, one way or another, such as trade talks between the US and China, overall trade policies, the government shutdown, tax reform, hurricanes, and the global economies

4)The Fed makes assessments and manages risk, including to the financial system. It is easy to criticize the Fed at having missed or having been slow to manage the risks that were building in the months leading up to the Great Recession of 2008-2009.

5)The Fed’s monetary policy offsets changes in our economy. When our economy is worsening and unemployment is rising, the Fed will adopt a more “accommodative” or “stimulative” monetary policy. They will take action to gradually reduce fed funds rates as a first step.

6) Higher economic growth may lead to stronger inflation as signals to the Fed to tighten money supply. When we are experiencing strong economic growth, it could fuel higher than normal inflation. The Fed’s action would be to tighten or constrain growth and often be referred to as “tight or “restrictive monetary policy”.

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