Forefront’s Monday Market Update
Understanding the jargon
One of the biggest challenges we all face when trying to become more engaged with our finances, and what is going on around us that can impact them is the fear of confusion. The jargon and lingo that we hear thrown around is often times confusing, and many people don’t want to ask a question for fear of being judged harshly.
This week’s Fed meeting
This week the Federal Open Market Committee (FOMC or “The Fed”) are holding their monthly meeting, and will release their highly anticipated statement on Wednesday, followed up by a press conference from Fed Chairman, Jerome Powell.
Since the lows of 2020 and the initial Covid Virus drop in the market, the U.S Economy has come roaring back. There will always be more that can be done, and room for improvement, but all signs point to enough progress being made that the Federal Reserve is not only contemplating, but anticipated to begin pulling some of its emergency policy moves back.
Cue the confusing headlines!
Monetary Policy – The feds ability to control the supply of money using various tools. The most common of which is interest rates. Low rates mean more supply of money. If money is cheaper to borrow, more people will borrow it. Higher interest rates mean less supply of money. If money is more expensive to borrow, less people will borrow it.
Quantitative Easing (QE) – When the Federal Reserve, or any countries central bank, buys bonds to keep interest rates low. If bonds are issued, and sell immediately, then the incentive given (interest rate) to buy the bond is the right incentive. When a central bank buys bonds, it is giving a sense of demand, which keeps interest rates low.
Tapering – Slowly buying less and less bonds, and not participating in as much quantitative easing over time.
The Bottom Line
The reason we are hearing these buzz words and jargon being thrown around is because our economy has recovered in such an incredible way that the Federal Reserve feel confident taking our economy off life support, and letting it stand on its own. This will start on Wednesday, when Fed Chair Jerome Powell is expected to announce that the central bank will begin tapering QE.
What this means
The easiest way to describe this is the Federal Reserve is going to stop buying treasury bonds and let interest rates fluctuate on their own. If more people want safety than bonds will be widely bought and interest rates will remain low. If people want to take more risk than they will purchase equities and bond rates will have to rise as an incentive for people to buy bonds. It is all based on demand.
At the end of the day, tapering of QE, and a step back by the central bank is a very clear indication that the economy is doing well enough that they feel the system can handle this. Yes, in the short term we might have some volatility, but this is a good thing for the markets, regardless of what the headlines and talking heads on TV say.
So how does this impact all of you?
- The economy is doing okay, get ready for a lot of lingo and jargon being thrown around on TV. Don’t let it stir up emotions of fear or panic.
- Ask questions. Good questions, bad questions, all questions, it doesn’t matter. It’s your money and your life, if you want answers, don’t hesitate to ask the question.
Stock market calendar this week:
MONDAY, NOV. 1
|Markit manufacturing PMI (final)
|ISM manufacturing index
TUESDAY, NOV. 2
|WEDNESDAY, NOV. 3
|ADP employment report
|Markit services PMI (final)
|ISM services index
|Federal Reserve statement
|Fed Chair Jerome Powell press conference
|THURSDAY, NOV. 4
|Initial jobless claims (regular state program)
|Continuing jobless claims (regular state program)
|International trade deficit
|Unit labor costs (SAAR)
FRIDAY, NOV. 5
|Average hourly earnings