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The Federal Reserve is a big reason why the stock market has done so well over the past year.
And it's the reason why the "money printer go brrrrr" meme exists.
But what exactly is the Federal Reserve?
And why does this Fed matter so much now, dear investor?
A thread.
And it's the reason why the "money printer go brrrrr" meme exists.
But what exactly is the Federal Reserve?
And why does this Fed matter so much now, dear investor?
A thread.
The Federal Reserve (the “Fed”) is the U.S. central bank.
It’s a system that exists to keep the economy running and financial risk in check.
It’s a system that exists to keep the economy running and financial risk in check.
The Fed is led by Jay Powell, who is the guy you see on the right in the "money printer go brrr" memes.
(IMO he has one of the toughest jobs in the world, but that's a thread for another day).
(IMO he has one of the toughest jobs in the world, but that's a thread for another day).
Above all, the Fed is bound to a “dual mandate” or two goals:
1)keep the job market as strong as possible
2)keep inflation in check
*and lately, its unofficial third goal has been supporting investor confidence
1)keep the job market as strong as possible
2)keep inflation in check
*and lately, its unofficial third goal has been supporting investor confidence
The Fed does this through several functions, including regulating banks.
But today, we’ll focus on what the Fed can do to markets.
But today, we’ll focus on what the Fed can do to markets.
If the economy is slowing (or growing too quickly) the Fed can pull a number of levels to keep growth in check.
Two popular ones are 1) tweaking interest rates and 2) buying bonds.
(that's the "money printer", as the kids say)
Two popular ones are 1) tweaking interest rates and 2) buying bonds.
(that's the "money printer", as the kids say)
BTW, you don’t want slow growth, but you also don’t want growth to accelerate so quickly that prices for goods and services rise faster than incomes.
Then you and I can't afford anything. Not good.
Then you and I can't afford anything. Not good.
How does this work?
Buying massive amounts of bonds can keep financial markets (like the stock market!) stable and money for companies and governments flowing when confidence is weak.
Buying massive amounts of bonds can keep financial markets (like the stock market!) stable and money for companies and governments flowing when confidence is weak.
And the Fed’s rate changes make it easier or harder for consumers to borrow and lend money (think mortgage rates, auto loan rates, savings rates).
The Fed typically makes policy updates eight times a year.
Most of the time, they leave policy the same if things are going well.
Most of the time, they leave policy the same if things are going well.
Right now, the Fed is doing THE MOST.
It had to cut interest rates to historic lows and start buying billions in bonds last spring to keep the economy afloat as businesses shut down.
It had to cut interest rates to historic lows and start buying billions in bonds last spring to keep the economy afloat as businesses shut down.
The Fed's historic, quick action arguably saved the economy from a much more painful downturn.
But now, economic growth is popping off, stocks are at record highs and we’re all getting ready for a ~hot vax summer~
The pandemic could be behind us soon.
That may make the Fed change its plans, and a Fed shift could upset the stock market.
The pandemic could be behind us soon.
That may make the Fed change its plans, and a Fed shift could upset the stock market.
Why? Because the Fed’s intervention is a big reason why the economy and markets are recovering so well.
We’ve seen that time and time again.
When the Fed moves from lowering rates to raising rates, the S&P 500 has notched lower returns on average (this chart is since 1950).
We’ve seen that time and time again.
When the Fed moves from lowering rates to raising rates, the S&P 500 has notched lower returns on average (this chart is since 1950).
To be fair, we don’t think the Fed will actually change anything soon.
But Jay Powell, who speaks after every announcement, could start teasing the idea of cutting back the Fed’s support soon, especially if growth stays this strong.
But Jay Powell, who speaks after every announcement, could start teasing the idea of cutting back the Fed’s support soon, especially if growth stays this strong.
It’ll likely be a veeeeeery gradual shift in his language and tone.
But that could be enough to ruffle feathers in the stock market because investors hang on his every word.
It's fascinating to watch a Powell press conference in action. Everybody should do it at least once.
But that could be enough to ruffle feathers in the stock market because investors hang on his every word.
It's fascinating to watch a Powell press conference in action. Everybody should do it at least once.
And lucky you, today is FED DAY.
The Fed is updating its policy at 2 pm ET (10 minutes), and Powell is speaking at 2:30.
Is he going to shut down the money printer? Doubt it. But it could be interesting.
The Fed is updating its policy at 2 pm ET (10 minutes), and Powell is speaking at 2:30.
Is he going to shut down the money printer? Doubt it. But it could be interesting.
That’s all from me.
Now you can impress your friends with all your Fed knowledge
Now you can impress your friends with all your Fed knowledge
Update: Jay Powell was stone cold today.
No change in policy, and the Fed isn’t even thinking about thinking about doing anything (his words, not mine).
He acknowledged that growth is picking up but there’s more work to be done.
On to the next one.
No change in policy, and the Fed isn’t even thinking about thinking about doing anything (his words, not mine).
He acknowledged that growth is picking up but there’s more work to be done.
On to the next one.
