The Federal Reserve meets once a quarter. After that meeting, they announce what, if any changes, they have made to the Fed’s interest rate policy. At the last meeting, there were no changes to the Federal Reserve’s interest rate targets. The Federal Reserve meeting notes refine the details of the main Fed announcement.
Fed’s Meeting Notes
Later, after they have been reviewed and made viewable for the public, the Fed releases the notes from it’s meeting. Financial analysts and market pundits then parse these notes for clues to the Fed’s thinking.
This time, everyone is looking toward how the notes take about bond-buying tapering.
What does this mean?
The short version is that when the economy went so bad back during the Great Recession following the real estate market crash, the Fed had to do more than just cut interest rates to stabilize the economy. In my opinion, the Fed Chairman Ben Bernake saved the US economy from a hard recession by flooding the market with liquidity and saying that he would keep doing it for as long as it takes.
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Basically, as long as it takes, has never really come. One of the ways that the Fed has been increasing liquidity in the market is by buying US Treasury bonds and mortgage-backed securities. Unlike Social Security, the Fed buys real US Treasury Bonds which means that it can actually sell them back into the market. This increases the amount of money in the economy, because when the Fed buys these investments, that cash it used goes into the world where it can be spent and moved around.
Every month the Fed buys $120 billion dollars worth of bonds and securities and that money flows back into the market where it increases the overall cash supply.
The Great Taper
The Fed said in July that it was not stopping buying those bonds yet. However, it has to stop some day, ideally before raising interest rates. But, stopping those purchases amounts to a brake on the overall economy, so it has to be done carefully.
Fortunately, unlike the clown show that is US politics, the Fed is run by serious economists doing a serious job. This is why it is so important for the Fed to remain independent despite some misguided calls by politicians looking to score points.
What people expect to see in these Fed meeting notes is some language that gives a clue to the Fed’s plans. There are really two ways this can go. One way is for these notes to indicate that the Fed is looking to reduce (or taper) its purchases starting in the fourth quarter. The other way is for the Fed to say that it won’t begin its taper until next year. In either instance, the Fed may give some indication of how fast (or steep) the taper will be.
What Does The Fed’s Taper Mean for Investors?
If the Fed continues its buying without a taper, then that means more money supply, which means more inflationary pressure. The amount of pressure and its impact is debatable, but the bond market, and other inflation sensitive investments, will react negatively.
If the Fed announces a taper then that’s less inflationary, so bonds and inflation sensitive investments will react positively. However, that reduced money supply might slow the economy, so the markets at large might react negatively as well.
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How To Invest
As always, a well-diversified portfolio tailored to your risk tolerance and goals, is the best way to save for long-term.
For short-term investors there is a play to made in options that profit when the market moves in either direction, but everyone knows this, and the relevant options are expensive. This play should be though out before hand.
For investors looking to put cash to work, the reaction to the Fed’s minutes is likely to be over done. So, investors looking to buy can swoop in if the markets react negatively.