Economics: What the Fed?

Economics talk is in the news now more than I can remember in recent years. This is understandable because of everything that is happening at the same time. The laundry list of economic issues include the war in Ukraine, supply chain issues, pandemic, high inflation, low wages, stock market recession, deglobalization, oil and gas drama, rising interest rates, housing prices are through the roof, low wheat supply, and even fertilizer is giving us problems.

So what is being done about all of this? What can we control?

Some of these we have no control over. Namely the war, the pandemic, wheat, potash, oil and gas supply and others not listed. These items rest in the hands of other countries and there are few short term solutions for these that we can accelerate. But just like my opinions when it comes to politics I say we need to focus on our local economy and worry about what we can control. The U.S. does this through the Federal Reserve System or “the Fed”.

The Fed was started in 1913 by President Woodrow Wilson to help prevent economic disruptions by business and banks. The Feds purpose is to create financial stability by regulating monetary policy and sustaining employment levels. Jerome Powell is the current head of the Fed so you will see him in the news a lot in 2022.

What is the Fed doing to control the economic situation?

This year started with the Fed increasing the Feds Fund Rate. By doing so, they impact borrowing rates for the entire economy. Rising rates means it is more expensive to borrow money to do things like buy a home, a car, and most importantly increase capital within a business for expansion. This is why you see tech and growth stocks taking a hit in the market because these companies tend to borrow money to spur faster growth. Many investors sent a lot of money into these companies because they were chasing performance and those investors are now taking large hits they didn’t see coming. But the Fed isn’t raising rates just to drive down stock prices, they are doing it to control inflation which hasn’t grown this fast since the 1980s. They will play with the rates until they hit what is called the “neutral rate” which is a point where inflation is stabilized. But they aren’t stopping there.

Another way they control inflation is by managing liquidity in the markets. The Fed has a balance sheet of long-term treasury securities and mortgage-backed securities that they buy and sell. When they buy them they are injecting money into the economy thus increasing liquidity. This increase helps buyers and sellers of assets to fuel the market. If there is less fuel then the machine can’t run as far but if there is too much then it can cause inflation growth. When they sell those securities they removing liquidity from the economy which has the opposite effect and can reduce inflation growth.

This is the next step the Fed is starting this month on June 1, 2022. Clearly this will impact the markets with more volatility but in the long run is good for the U.S. economy. There are many opinions out there that they should have let the market correct itself all the way to they should have stepped in sooner but that is out of our control. What we can control is our asset allocation and personal budgets. Diversifying and having a good rebalancing plan is the best way to control our local economies(our own money). Adding emotions will only cloud our judgement to making wise investment decisions.

What can you do about it?

You don’t have to make those tough decisions on our own. Working with an advisor to create an investment plan is the best way to deal with these turbulent conditions. Hit the scheduling button to discuss your options.

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Ryan@if-money.com