Want Financial Prosperity? Then Don’t Fight the Fed!

Don’t fight the Fed! I’m sure you’ve heard that at some point in the past, especially if you’ve been trading the markets or even studying them.

The Federal Reserve Bank has several tools it uses to help with its congressional mandates on price stability and maximum employment. When the Fed changes course on monetary policy by tightening or loosening money supply, investors should understand how it could affect their investments.

The Fed can lower or raise the Federal Funds rate and it can affect interest rates across the spectrum (short- to long-term rates). The Fed Funds rate is simply the overnight rate banking institutions pay to borrow money needed for their reserve requirements.

This is just one tool the Fed uses but it encourages banks to lend more… and invest more freely when the rate is lowered.

Raising or lowering the Fed Funds rate has been effective in helping stabilize prices in an inflationary environment. Since we’ve been at a zero rate for the past six years, the effectiveness on deflation has been suspect.

For that reason, the Fed instituted quantitative easing (QE) which, in essence, was a creation of money supply fueled by buying U.S. Treasury bonds created out of thin air and the purchasing agency guaranteed mortgage-backed securities. Those asset purchases injected about $85 billion per month into the money supply in an effort to create inflation. QE finally ended in October of last year after nearly six years.

And so, the Fed’s target inflation rate has been 2% per year and after six years and trillions of dollars that were created on the Fed’s balance sheet, we still sit under the 2% target inflation rate.

The main beneficiary of the Fed’s easy money policy has been the stock markets, otherwise known as “risk” assets, to gain acceptable investment returns in this environment. When the Fed finally reverses course and starts to tighten the money supply, make sure your investments move to safer assets like cash.

Please, don’t fight the Fed!

Lance Gaitan
Lance

How Will Trump Restore the Dream of the Golden Years?

President Trump has come into office with a tall order at hand, one of many, to restore faith in our ability to retire on time…. or at least come close.

But unfortunately, the reality is that the numbers aren’t in his favor… or ours.

We dive deep into U.S. retirement figures, looking at why people are reporting such modest nest eggs, to gain perspective on the future of the retirement landscape in our latest infographic: How Will Trump Restore the Dream of the Golden Years?

Click to Learn More
Categories: Economy

About Author

Lance Gaitan graduated from Franklin University in Columbus, OH with a degree in Finance. After graduating and working as an auditor for an insurance administrator as a number of years, he attained his securities license. He then went to work as a broker for a small firm and during the mid-1990’s Lance managed the futures trading desk for Piper Jaffray, a large regional brokerage firm based in Minneapolis. After migrating to Florida in early 2000, Lance founded a futures trading firm, GSV Futures, specializing in retail commodity trading strategies. Lance sold that business in 2006 and joined Harry Dent, Jr. and Rodney Johnson at Dent Research shortly thereafter.