Federal Reserve – The secret power center



The Federal Reserve Bank (Fed) controls the movement of money throughout the American finance system and indirectly influences the flow of capital across the world through its interest rate and asset buy back policies. Janet Yellen, the 67-year-old chair of the Federal Reserve, is ranked the second most powerful woman in the world by Forbes magazine.

The Fed determines the future course for the US financial machinery at the Federal Open Market Committee (FOMC) meetings that occur eight times a year. The announcement following this meeting is very important and the markets all over the world look forward to the specifics of the decisions taken, especially with regard to interest rates.

As the asset buy back is somewhat set on an auto-pilot mode with reductions of $10 billion until it is expected to end during the second half of 2014, the focus has shifted entirely towards the movement in interest rates.

What makes FOMC decisions so important? In March, the Fed estimated that the interest rate, now close to zero, would rise to 1 percent possibly at the end of 2015 and to 2.25 percent a year later. Off-the-cuff comment by Yellen, at her first news conference, suggesting the Fed could start raising short-term interest rates “six months” after it ends its bond-buying program spooked investors and hammered the stock markets across the world.

Following is a chart that plots the standard deviation of five-minute asset price returns around the FOMC minutes release (solid line).

Source: New York Fed

However, the Fed has clarified and assured markets that it would like to see interest rates at zero, despite Labour markets showing healthy recovery (unemployment rate stable at 5-year lows of 6.3%) and inflation closer to the Fed target rate of 2%. This is because the Fed believes that the economy and Labour recovery are still fragile in the US and any changes to the interest rate environment will cause serious damage to their recovery.

The Fed in its just concluded, June 2014 FOMC meeting has repeated its stance of zero interest rates during the short to medium-term in order to cement the economic recovery in the US on a firm footing. As such, one of the biggest macro-economic risks for asset classes like stocks and bonds has been tempered down. The markets will still look forward to every Fed de-brief to spot clues on the future of the interest rate environment in the world’s largest economy. It is important for investors to keep a watch on the Fed announcements, as this might cause a flurry in the stock markets and impact borrowing costs.

If you are keen on understanding the effect of interest rates on your portfolio, please schedule an appointment with Dino Zavagno MD at Gladstone Morgan or with one of our specialists for a one on one meeting.

Disclaimer: All content provided on this page are for informational purposes only. Gladstone Morgan Limited makes no representations as to the accuracy or completeness of any information on this page or found by following any link on this page. Gladstone Morgan Limited will not be liable for any errors or omissions in this information nor for the availability of this information. Gladstone Morgan Limited will not be liable for any losses, injuries, or damages from the display or use of this information. This policy is subject to change at any time.

It should be noted the services available from Gladstone Morgan Limited will vary from country to country. Nothing in the comments above should be taken as offering investment advice or making an offer of any kind with regard to financial products or services. It is therefore important to reinforce that all comments above are designed to be general in nature and should not be relied upon for considering investment decisions without talking to licensed advisers in the country you reside or where your assets may located.Gladstone Morgan Ltd is not SFC authorized. Gladstone Morgan Ltd in Hong Kong is licensed with the Hong Kong Confederation of Insurance Brokers.