They can not have access to the armed forces, but it is often argued that the Federal Reserve chairman has a level of world power and influence that rivals that of President of the United States. While most investors know the name of the current Fed chief Ben Bernanke how her decision impacts your money is much harder to achieve. In this installment of Investing 101, we indicate how the Federal Reserve policy decisions impact on your investments in stocks, bonds and commodities.
1. Liquidity from the Fed and stocks
The role of the Fed is simple on paper. The entity is to carry out a dual mandate to use monetary policy to promote employment and price stability (inflation). That’s it. While many critics argue that the financial crisis of 2008 caused the Bernanke Fed to deviate beyond their traditional mandate, the debate is best left to scientists.
What you need to know is if the Fed lowers interest rates or adding money or take other measures that foster or promote economic growth – “. Easing cycle” usually referred to as a
“When the Fed is adding liquidity into the system, it is good for stocks,” said Doug Roberts, author of Follow the Fed to investment success. “If they are not providing liquidity (which is called” tightening”) and there is a crisis when the economy is contracting, it is bad for stocks. ”
But it’s not as simple as higher rates compared to lower rates.
“I think you should really look at what the Fed is doing,” says Roberts. “If you rely on what they say, it is sometimes confusing.”
The Fed holds eight regular meetings per year, and it seems captivated everyone’s attention on Wall Street. Investors are trying very hard to detect any hints that the Fed could be the evolution of its political and economic prospects.
2. Interest rates and bond yields
Like stocks, your bonds are also affected by rising and falling interest rates or other actions of easing and tightening by the Fed. In other words, if the Fed is easing and cut interest rates, the value of your bonds will generally increase. But, if rates go, the value of your obligations to pay a lower percentage will decrease.
At the same time, you must remember the second part of the Fed’s mandate – price stability / inflation. Be aware that a rate hike is the most secure method known for reducing inflation, but there is a catch.
“The bonds may do well when inflation is higher than borrowing costs in the short term,” says Roberts, but stresses that this occurs when there is usually a good time to possess gold.
Apart from its policy interest rate has kept rates near zero for the last three years, the Fed is now heavily involved in the bond market by buying bonds directly. These unprecedented measures, made under the banner of quantitative easing (or “QE” for short), had a huge effect on the market, the same as if an investor were suddenly extremely rich buy houses, wood or gold.
3) the Fed’s impact on gold & Commodities
Speaking of gold, the role of the precious metal as an investment that can protect you from inflation is only part of why it is performed by words and actions of the Federal Reserve. Because the dollar is directly related to the rise and fall rates,” said Roberts depreciation of the currency “has as much if not more, impact on commodity prices.
Therefore, falling interest rates and a falling dollar tends to increase the attractiveness and the price of gold, oil and other commodities.
“These assets are inherently volatile, even in times of property, so you should be prepared,” warns Roberts, reaffirming the need to be careful and be aware of how the Fed easing and tightening impacts virtually all asset classes.