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July 2024 – The Fed, In Perspective

The financial media constantly addresses current and expected Federal Reserve policy. This is not surprising as the Fed has tremendous influence over money supply and credit, the lifeblood of the economy. In this issue we delve further into the Fed’s influence over rates and what investors should take away from it.

The Fed either sets or has effective control over only three rates. The federal funds rate is set by the Federal Reserve Open Market Committee (FOMC). It is the rate that member banks charge one another for overnight lending, to meet ongoing liquidity needs. The discount rate is set by the Fed’s board of governors. This is the rate that the Fed charges member banks to borrow from the fed directly, if needed, to meet liquidity requirements. The interest rate on reserve balances (IORB), also set by the board of governors, is the rate the Fed pays member banks on reserves they hold in their Federal Reserve bank accounts.

The Fed Funds rate is most frequently addressed by pundits and in our view this coverage is overdone. Market participants “price in” expectations of future changes in this rate. Moreover, while the Fed has substantial influence over current rates paid on short-term instruments such as treasury bills, money market funds, and CD rates, it has only limited influence over current interest rates at large, that is over intermediate and long-term bonds that comprise the rest of the yield curve.

Attempting to predict the timing, pace, and magnitude of future Federal Reserve interest rate decisions is not a worthwhile endeavor. While the Federal Reserve has a lot of influence on the future direction of the economy, their decisions and the market reaction to those eventual decisions are completely unpredictable. Thus, it is likely better to leave the prognostication and discussion of Federal Reserve interest rate policy to the arena of academia as opposed to allowing it to dictate investment decisions.

Also In This Issue

“Normal” Yields
Quarterly Review of Capital Markets: Optimism Reigns
The High-Yield Dow Investment Strategy
Recent Markets Statistics
The Dow Jones Industrials Ranked by Yield
Asset Class Investment Vehicles

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