What Monetary Policy Means for Your Investmentshttp://www.fool.com/investing/general/2013/04/04/what-monetary-policy-means-for-your-investments.aspx Dan Caplinger
April 4, 2013
For years, commentators have endlessly talked about the accommodative monetary policy that the Federal Reserve has provided to try to boost the U.S. economy. But for most investors, it's hard to figure out exactly what monetary policy is, let alone how it affects them and their money.
In order to understand monetary policy, the natural first place to get information is from the Federal Reserve itself. Using its resources, let's take a look at how the Fed uses various tools to implement and manage the role that money pays in the economy.
The Fed and you
The Fed's most important monetary tool lately, however, has been its open market operations. Before the financial crisis, the Fed tended to buy and sell primarily short-term securities in an effort to maintain the supply and-demand dynamics that affect the federal funds rate. After setting a fed-funds target, the Fed typically used what's known as repurchase and reverse repurchase agreements to influence trading in the federal funds market to keep market conditions from disrupting its monetary policy and keep the actual fed funds rate near its target. These temporary open market operations fine-tuned rate levels effectively.
More recently, though, the Fed's open market operations have included massive asset purchases that have targeted longer-term rates. By spending hundreds of billions of dollars on purchasing long-term Treasury bonds and mortgage-backed securities, the Fed has tried to keep long-term rates low in order to spur businesses to make investments that boost economic activity and create jobs.
Does monetary policy help you or hurt you?