Updated: Feb 7
Throughout the course of the pandemic, low-interest rates and huge stimulus packages have allowed for huge price increases in financial assets. With low-interest rates, high-growth companies are especially valuable for their potential future returns. Most prominently, the S&P 500 tech giants like Apple witnessed immense stock growth. Recently, investors have started to panic after Fed officials reported that they are seriously considering a "tighter monetary policy". This has resulted in considerable panic selling and the market's worst weekly performance in two years.
Due to the sheer volatility in the financial markets, the Fed's actions can have severe adverse effects if they are not effectively communicated beforehand. For example, many countries with high dollar-denominated debt, debt issued in US dollars rather than foreign currency, will suffer from a hike in interest rates. This is increasingly important to take into consideration as the global economy attempts to recover from the wrath of the pandemic.
Key Concept Recap
Monetary policy is the various ways that the supply of money in the economy is controlled. The Federal Reserve utilizes this policy to control inflation, money supply, and liquidity in the market.
Expansionary (Loose) Monetary Policy
Contractionary (Tight) Monetary Policy
Increase money supply which will stimulate borrowing, spending, and inflation.
Decrease money supply which will slow borrowing, spending, and inflation.
Primarily done by decreasing interest rates
Primarily done by increasing interest rates