The Federal Reserve Bank Announcements and Monetary Policies

September 30, 2010 – The Federal Open Market Committee met a couple of weeks ago to discuss the state of the economy.  They do this about 8 times a year and it’s a big time meeting of all the Fed governors from around the country.  The investing community watches and listens closely to the results of this meeting with a microscope.

If you’ve been in stocks long enough, you know that the Fed and their announcements are an important component to any good retirement investment strategy.  They really do move the markets, although it is debatable how correct they are in their predictions and status updates on the US economy.

They often use what they call Fed-speak, in which they use very esoteric language to describe their assessment of the economy as well as their intentions for any monetary policy changes.  This can be a little difficult, especially those new to investing and are trying to learn stock market basics like reading P/E ratios and price quotes.

Well at their last meeting, they continued to beat the drum of a gloomy outlook for recovery.  Although they acknowledged that economic growth is occurring in the US, they continued to say that it would be a long road to be back to where we were when this whole thing started back in 2008.

In an effort to boost the stock market and business community, they hinted at what they call quantitative easing.  It’s Fed-speak for, “we will print money and pump it into the system”.  What this does is make the USD cheap, which brings down borrowing costs, which will eventually lead to businesses getting loans to inject back into the economy.

This is intended to be a short-term strategy to give a stimulus to the economy.  The game here is to pump enough to get the economic engines going, but to not do it so much that the USD loses it’s purchasing power.  If that happens, it basically cancels out the growth rate.

 

 

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