They may not have access to the armed forces but it is often argued that the chairman of the Federal Reserve has a level of global power and influence that rivals that of the U.S. president. While most investors know the name of the current Fed chief, Ben Bernanke, how his decision-making impacts your money is much more elusive. In this installment of Investing 101, we address how the Federal Reserve's policy-making decisions impact your investments in stocks, bonds, and commodities.
1. Fed Liquidity & Stocks
The role of the Fed is simple on paper. The entity exists to carry out a dual mandate to use monetary policy to promote maximum employment and stable prices (keep inflation in check). That's it. While many critics believe the 2008 financial crisis caused the Bernanke Fed to stray beyond their traditional mandate, the debate is best left to the scholars.
What you need to know is whether the Fed is lowering interest rates or adding money or taking other actions that support or nurture economic growth --generally referred to as an "easing cycle."
"When the Fed is adding liquidity into the system, it's good for stocks," says Doug Roberts, author of Follow the Fed to Investment Success. "If they're not injecting liquidity (which is called ''tightening") and there's a crisis where the economic system is contracting, it's bad for stocks."
But it's not as simple as higher rates versus lower rates.Read More »from 3 Ways the Federal Reserve Is Impacting Your Money