Question

Is the Federal Reserve focused on day-to-day movements in stock and bond prices? Why or why not? Do not exceed 200 words

Answer 1

The Federal Reserve System (FRS) is the central bank of the U.S. The Fed, as it is commonly known, regulates the U.S. monetary and financial system. The Federal Reserve System is composed of a central governmental agency in Washington, D.C., the Board of Governors, and 12 regional Federal Reserve Banks in major cities throughout the U.S.

Investors, the Federal Reserve, and businesses continuously monitor and worry about the level of inflation.1 Inflation—the rise in the price of goods and services—reduces the purchasing power each unit of currency can buy. Rising inflation has an insidious effect: input prices are higher, consumers can purchase fewer goods, revenues, and profits decline, and the economy slows for a time until a measure of economic equilibrium is reached.

WITH ATTENTION ON THE Federal Reserve and its decisions on interest rates, investors may be reviewing the expected return in both the equity and fixed-income portions of their portfolios.

With bonds, the equation is fairly obvious. As interest rates decline, bond prices rise. Say you buy a bond with an interest rate of 3%. Shortly after that, interest rates drop to 2.75%. Now your bond pays more interest than newly available fixed-income instruments. Investors would pay a premium to purchase that bond, to capture the higher return.