Inflation, Easing and Unemployment: The Fed Decoded

What exactly does the Fed do and why?

   

While the Fed meeting has been at the center of headlines this week, if you’ve ever wondered exactly what it’s trying to do with all of the policies, Wade Hansen explains.

Video Transcript

The difference between inflation and core inflation is that core inflation does not take into account energy or food prices. All of us as individual consumers, we’d say, “Why on Earth wouldn’t the Fed be looking at energy and food?”

They do look at both, but they pay the most attention to the core inflation number because the Fed doesn’t really think it has a lot of control over energy or food prices. The Fed can’t do much to control oil prices. It can’t do much to control corn and wheat and other food prices, so they tend not to focus on it as much as they are trying to make their monetary policy decisions.

So, what the Fed is trying to do is boost GDP growth, it’s trying to lower the unemployment rate, and it’s trying to do that by having a very accommodative monetary policy with interest rates at or near zero. It’s continuing to buy Treasuries and agency-backed mortgage securities and all the while it is monitoring inflation to make sure that it doesn’t get out of control because if inflation really starts to rise, then the Fed has to raise interest rates and that would hamper GDP growth and it would hamper bringing down the unemployment rate.

We get these GDP projections going out to 2013, 2014 and 2015. On the chart in the video, I show you how the projections have changed. At the same time, the Fed is saying it won’t be backing off of its aggressive monetary policy.

Now, I look at it as this is the Fed’s way of “winking” to Wall Street and saying, “We have lowered our projections ever so slightly to give you a clue that we are in this for the long haul. We’re not going to be taking our foot off the accelerator any time soon.”

I show you some of the other changes to the Fed’s projection in the video, but what’s especially interesting is a series of charts outliing the number of Fed officials that believe they will start to begin raising interest rates and tightening down on monetary policy in the following years. There’s one who thinks the Fed should be doing it in 2013, four who think the Fed should be doing it in 2014 and the broad majority think it’s going to  happen in 2015, so that’s still a ways down the road.

It is providing for a very accommodative monetary policy here in the U.S., and we’ve seen the U.S. stock market take full advantage of that accommodative monetary policy by moving higher, higher and higher.

 

Investor Place advisors John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news.  Get in on the next trade and get 1 free month today by clicking here.


Article printed from InvestorPlace Media, http://investorplace.com/247trader/inflation-easing-and-unemployment-the-fed-decoded/.

©2014 InvestorPlace Media, LLC

Comments are currently unavailable. Please check back soon.