Stock Investment Strategies – Monetary Policy

It is important to understand how monetary policy affects your stock investment strategies.  It is one of the main things that move the markets.  You need to understand how investors view it and how it affects the markets.  It is just one in a matrix of variables that make financial markets move.

The monetary policy in the United States and most other countries are determined by the central bank.  In the US, the Federal Reserve Bank makes these policies.

The main event of the Fed happens 8 times a year at the Federal Open Market Committee.  This is a meeting that includes all of the 7 officials on the Board of Governors.  It also includes the head of the New York Federal Reserve Bank as well as the presidents of 4 out of 11 of the other Federal Reserve Banks in different parts of the country.

These meetings can’t give you individual stock picks.  It doesn’t work that way.  They won’t tell you which are good stocks to invest in.  Rather, it tells you on a macro level how the Fed’s decisions and policies might affect the market as a whole.

The thing that most investors watch is what the Fed will do with interest rates.  I’ll talk a little bit about how this came to be the most important aspect of these meetings.  But suffice it to say, this one little number is what the world markets watch with held breath.

If you read or watch any financial media, you’ll find speculation about the Fed’s interest rate predictions everywhere.  It’s almost like idle talk sometimes because everyone is trying to predict what this central bank will decide.

In fact, it can be outright humorous.  Fed watchers will listen closely to the Chairman’s speeches to decipher what their next move is going to be.  It’s like trying to break a code or something.

Big Deal About Interest Rates

Here’s the big hoopla about interest rates.  Essentially, higher interest rates will slow down the economy and lower ones will speed it up.  When an economy is in recession, the central bank will lower interest rates making money cheap to borrow.  This greases the wheels of commerce, businesses start expanding, hiring more workers.  Then those workers, who are also consumers, go out spending money, expanding the economy even more.

When the economy starts to overheat and to grow too fast for it’s own good, the Fed will raise interest rates in an effort to slow it down.  That is because when the economy is growing too much, too fast, something called inflation starts to happen and that’s not good for the economy either.  It’s important to get this because even the best investments will be adversely affected by interest rate hikes.  So as an investor, it’s important to understand where the interest rates are and how any changes will affect your portfolio.