The Federal Reserve Will Be Sensitive to Market Risks
The Federal Reserve recently made reassuring statements about being sensitive to market requirements while also stressing its obligation to broader economic objectives.
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The Importance of Investor Sentiment
Investor sentiment is significant for market performance. While it shouldn’t be the only thing given importance, since there are other factors that come to play, it doesn’t take too long to realize that what investors feel about the market often influences how it ends up – whether the selling takes precedence over the buying or vice versa.
And investor sentiment isn’t only governed by the performance of companies that are represented by their stocks in the stock market, but also economic factors and the central bank of the United States, the Federal Reserve that decides, among other things, the interest rates. The Fed’s movements have often caused worry for investors. But it recently sought to calm those fears.
Fed Chairman’s Calming Words
The Fed has given some hope for investors and traders. Jerome Powell, Chairman of the Federal Reserve recently announced that the bank would be sensitive to the fears of investors and would adopt a less aggressive monetary policy. That bodes well for 2019. Specifically, Powell indicated flexibility in how the Fed would decide interest rate hikes in the future, considering the fact that the past few months have seen a great deal of volatility in the global stock markets.
Powell mentioned that the Fed would balance economic data against the many potential risks such as trade worries and fears of slowing worldwide growth. That’s just what investors wanted to hear. He did observe that the momentum of the US economy is strong, though.
Positive Reaction from the Market
Sure enough, these comments immediately sent the S&P 500 index up by over 3% on January 4, 2019 in trading in early afternoon. There was also a rise in US Treasury yields. Such performance is to be expected when the Fed makes reassuring statements. Powell’s commitment towards policy flexibility also applies to the balance sheet of the Fed where you have the monthly reductions.
Powell opined that the steady decline experienced in the bond holdings of the Fed wasn’t really having a major impact on the markets. But if the decline did begin to interfere with the objectives of stable inflation and strong employment, Powell maintained that there would be a policy change. That gave an indication that though economic data was something the Fed would be dependent on, it would take important decisions if its broader objectives weren’t being met.
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