The hottest Monetary Policy Substack posts right now

The Fed has a big influence on the stock market, but it's not as powerful as many investors think. Market reactions often come from what people believe the Fed will do with interest rates.
Interest rates are determined not just by the Fed, but also by supply and demand in the economy. As the economy grows, interest rates tend to rise because of increased demand for capital.
Investors need to be careful about how they assume the economy and interest rates will behave together. Scenarios where growth happens while keeping interest rates low may not be realistic.

The Federal Reserve only controls the Fed Funds rate, not other interest rates like mortgages or corporate bonds. This means that its power over the entire market is limited.
The Fed can influence short-term interest rates more easily than long-term rates. Despite their actions, they can't fully control the bond market, which is very large.
If the economy starts growing, interest rates are likely to rise, which contradicts the Fed's goal of keeping them low. This creates a tricky situation where their actions may not lead to the intended economic growth.

Operation Twist II involves the Fed changing what types of bonds it buys without adding more money to the economy. This means they're focusing on long-term bonds to lower their rates.
There are three main ideas about how this could help the economy: lowering long-term rates could encourage borrowing, make people feel more confident in spending, and raise stock prices by shifting the way rates affect valuations.
However, there are doubts about whether these ideas will actually work, as the current rates are already low and it’s unclear if this action will cause meaningful changes in growth or prices.

Injecting money into the economy aims to lower interest rates and encourage borrowing, but rates are already very low. It's unclear if lowering them further will actually get people to borrow more.
Many households are already in debt, and encouraging them to borrow more could lead to future financial problems. It's like creating a bubble that could burst.
There's a worry that printing more money could lead to inflation and make the dollar weaker, which would increase prices for imported goods. This could hurt consumers in the long run.

Central banks like the Federal Reserve influence stock prices in complex ways. A small rise in interest rates doesn't always mean bad news for stocks as their effects can vary.
Short-term interest rates can drop when central banks raise rates, which might be seen as a move to control inflation. This action can sometimes lead to lower long-term rates.
The credibility of a central bank matters a lot. If it’s seen as strong and effective, a rate increase can be viewed positively, suggesting the economy is strong enough to handle it.

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Creating a new Agency for Financial Stability may not be a good idea. The Federal Reserve already has competent people managing banking regulations, so restructuring might not improve things.
Systemic risk is a problem because it affects everyone but only a few get the rewards. We should focus on making sure that those who take big risks also face the consequences if things go wrong.
Instead of establishing a new agency, we should empower existing banking authorities to monitor risks better. It's important for regulators to be proactive rather than just reacting to past crises.

Nominal interest rates can potentially go negative, which is unusual and complicated. It makes people question why they'd invest in something that returns less money in the future.
For smaller amounts of money, people would prefer safer options like checking accounts or cash at home rather than investing with negative returns.
Large investors are showing distrust in banks by accepting negative interest rates rather than risking their cash in a bank, which highlights concerns about the banking system's stability.