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 Market Mysteries of the week

  Why does everyone care about the Fed, and what are they tapering?

Answer: The Fed is behind all the “money printing” you might hear about. People are constantly debating when they think the Fed will start to taper, or slow, the amount of money they’re printing.Who’s the Fed, and why should I care?The Fed, aka the Federal Reserve, aka the Central Bank, controls our whole money system. They are responsible for stimulating the economy when it’s struggling and moderating it when it starts to overheat. They regulate this metaphorical temperature of the economy with two main tools:First, the Fed sets baseline interest rates for all of the banks. So when the economy is struggling, like it has been this past year, they lower the baseline rate to 0%. That leads the banks to lower their interest rates on everything from savings accounts to loans. Lower interest rates on our credit cards, mortgages, or auto loans make it easier to spend. Lower interest on our savings accounts makes it less attractive to save. It works the same way with corporations as well. Lower interest rates stimulate spending and investing.The second major tool they have is printing money. They’re not physically printing dollar bills. They increase the amount of money in circulation to ensure that the financial pipes keep flowing and that anyone who needs money can get it. They “print” money by purchasing stuff with money that the Fed essentially speaks into existence. For example, they buy US government bonds from banks and institutions, hold onto the bonds, and the banks then get to lend out this new money they got in exchange.What would make them stop stimulating the economy?The Fed is constantly monitoring and analyzing all kinds of economic data points. The main two things they tend to focus on are the unemployment rate and the inflation rate.The unemployment rate is important because it shows whether we’re operating at our economic potential. If companies are laying more people off than they’re hiring, that means the company’s not growing. The Fed’s always aiming to get the economy to full employment. The unemployment rate in July was 5.4%, so 8.7 million people are still out of work. Before the pandemic, the unemployment rate was under 4%, so there's still some work to do.Inflation is the other most important data point the Fed watches. It’s their best temperature gauge. Low inflation is a sign of a healthy, growing economy because if things consistently got less expensive, we would be incentivized to delay spending, and the economy would struggle. The Fed targets about 2% inflation. But if prices rise too quickly, that means there are imbalances or supply shortages in the economy, or there’s just too much spending and demand for the given available resources. When inflation is too high for too long, the Fed has to step in to slow things down. It will raise interest rates and reduce the money supply. The inflation rate was high in June, at 5.4%, but it's comparing to a low baseline of last year. The Fed thinks it will be mostly short-term trouble.Should I be worried now?There’s no reason to worry yet. The economy moves slowly, so the Fed moves slowly. Right now, people are debating whether the Fed will start to taper or cut back on their stimulus in 6-18 months. And when that happens, it will just be them rolling back from their unprecedented, extreme, pandemic, global crisis, emergency stimulus mode. It would be a reasonable expectation for them to do that eventually.Don’t let the Fed get you in a taper tantrum just yet.Please feel free to forward this to anyone who might find this interesting.💙 The Scoop Team

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