To accept the central bank’s message by the financial market is one of the most difficult aspects of monetary policy.
The US Federal Reserve’s chairman, Jerome Powell, has been stressing the value of rising interest rates and containing inflation for some time. The financial markets, however, appear to have disregarded his message.
Powell reaffirmed his statement on Friday, stating that the Fed’s main objective is to get inflation down to 2% because, without price stability, the economy cannot function for anyone. The Dow Jones Industrial Average dropped by 3% as a result of the stock market, this time taking Powell’s comments seriously.
Why did the stock market take Powell’s message so long to sink in is a question. The federal funds rate, the interest rate at which commercial banks conduct overnight borrowing and lending to one another, is one way the Fed attempts to control short-term interest rates.
A central bank’s balance sheet should typically grow at a rate that is more or less comparable to the country’s overall rate of economic expansion. This year, the Fed has been gradually increasing the federal funds rate.
The Fed has been printing money and injecting it into the financial system by purchasing bonds, which has caused this surge.
It did so between 2008 and 2014 to save struggling financial institutions and then to lower long-term interest rates to encourage individuals and businesses to borrow, spend money, and support economic expansion.
More at: FXlearnpro.com
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