The Federal Reserve has been hovering in the headlines over the past few months, as investors and financial institutions around the world keep a close eye on its plans to buy massive amounts of mortgage backed securities. Although it might seem that the Fed’s movements matter only to those connoted to the money markets, the Reserve’s decisions affect the lives of nearly everyone.
The Federal Reserve, headed at this particular moment by Chairman Ben Bernanke, is actually a network of 12 regional government banks, whose main job is to regulate the ebb and flow of money in order to keep the economy stable. The Fed’s power over the lives of ordinary Americans derives from its authority to manipulate how much money is circulating.
That’s why the bond buy up effort has continued to make news. Faced with a struggling economy that’s taking too long to rebound m the housing crash and the recession that followed, the Fed instituted a massive, not just large, scale effort to buy up trillions of mortgage-backed securities. The buyup put money back into the banking system, which in turn pushed interest rates low.
The opposite can also happen. The Fed can tighten up the flow of money into the economy, too, by selling those same securities and bonds. Interest rates rise, causing a ripple effect in the economy: it costs more to buy a house or car; so buying slows and so does job growth in some sectors.
Because of its control over the flow of money, the Fed’s actions also ripple through the global financial network and affect trading worldwide. That’s why the recent mixed messages about the future of the bond buy up had investors and financiers around the world keeping an anxious eye on the outcome. Interest rates set by US banks play a major role in lending rates worldwide, so tweaks to the bond program can affect consumers halfway around the world as well as at home.
The long arm of the Fed affects everything from checking accounts to the prices you pay at the grocery store – and its decisions, for good or ill; direct the movement of money on ever level of society. At the moment, the bond buyup is keeping money flowing – good news for income property investors, who can still take advantage of low rates on a long term mortgage as Jason Hartman recommends. (Top image: Flickr/PhilipTaylorPT)
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