It’s a bird, it’s a plane, it’s… Janet Yellen here to save the day! The Fed meeting minutes were released this afternoon, sending the market sharply up 2%.
Right before this, I was about ready to lose it. All of my positions, which have already been trading lower in the notorious October dip (stocks tend to decrease in October), were tanking after the market’s nose dive yesterday. I am trying to become as non-emotional of an investor as possible, but today wasn’t really helping that goal.
But then, like a rainbow after a storm, the Fed minutes made everything better. Before I explain why, let’s chat about what these mystical Fed minutes are. The Fed is just short for the Federal Reserve, the central bank of the US. It sets monetary policy and interest rates. Did you buy a house this year and get a low mortgage rate? Thank the Fed. The Fed holds eight regularly scheduled meetings during the year and releases the minutes of the meetings three weeks after.
For those bored already, the Cliff notes version of the Fed minutes are:
- Interest rates aren’t rising anytime soon
- Quantitative easing (bond buying by the Fed) is ending this month
- The dollar is appreciating thanks to Europe’s economy falling apart
- Stock investors are happy
Now, back to the details…
So, why do Fed minutes matter? While the phrase monetary policy meeting notes doesn’t sound particularly exciting, the Fed’s decisions can have a big impact on the market. Although there are many reasons the Fed moves the market, including sharing its views on the economy, one key to remember is that interest rates and the stock market tend to be inversely related. If interest rates are high, bond investments become more valuable, so there is less money invested in stocks.
These particular Fed meeting minutes are important because the Fed has been keeping interest rates low the past few years as a way to help the economy recover from the recession. The Fed has been doing this in two main ways. They have been buying US Treasury bonds to keep long term interest rates low (a program called quantitative easing), and they have been keeping the federal funds rate (the rate at which banks lend funds to each other overnight) close to 0.
As the economy has been improving recently, investors have become concerned that the Fed would increase interest rates again. In the notes the Fed said it plans to end its quantitative easing program at the end of this month. While that’s not good, it was also expected so it didn’t shock anyone. The good news driving the market is that the Fed said it plans to keep the fed funds rate at its current rate of ~0 for a “considerable time” (translation: the Fed can’t commit to a date but it’s not anytime soon). This announcement put investors’ minds at ease.
Even though the economy has been improving, the Fed decided not to raise rates essentially because the rest of the world is falling apart. They’re concerned about slowing inflation and the economic problems going on in Europe and Asia driving up the dollar. While a higher dollar value is good if you’re Euro-tripping, it’s bad if you’re an American company trying to do business internationally (and therefore it’s bad for the American economy).
My investment recommendation: a plane ticket*. If you’ve been debating a trip to Europe you might as well book it now that you can get even more croissants per dollar.
*Assuming you’ve properly saved up for it.