Individual Stocks

Understanding Financial Markets

What impact does the Federal Reserve (the “Fed”) have on bonds and equity investments?

The Federal Reserve’s policy has an enormous effect on what happens in financial markets. It is charged to maintain the overall stability of our economic system so that it does not expand or contract too quickly, which could devastate our financial markets. As economic expansions occur, and equity investments increase in value, the Fed may tighten the availability of credit and raise interest rates in order to avert high inflation. This action may abruptly affect some equity investments in the short term, as some investors may move money from equities to cash in order to take advantage of increasing interest rates. This may depress overall equity prices, as a greater supply and less demand for equities may occur. In times of economic contraction, the Fed may do the opposite—reducing interest rates and making credit more widely available, in order to stimulate a stagnant economy.


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