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Top 5 ways Federal Reserve can influence the American Stock Market

federal resFederal Reserve or simply the Fed is a central bank of America. The main task of fed is to regulate the monetary policy across the country and to sustain the value of dollar up to the certain extent of time. It prohibits the external forces to affect the local economy by keeping an eye on financial and economic system of the country. Likewise as we have learned earlier that every piece of news related to economy and financial sector can revolve the investors’ sentiments in order to trade in the stock market, policies of fed can also affect the stock market performance in several ways. Some of the potential ways are being discussed in later section of the article.

  1. Monetary Base

Each person having excess money is a potential investor, it is the matter of benefit that where does he go to invest his money to get some return over it. Monetary base or interest rate is a basic indicator by which an investor can evaluate the several outcomes. Usually when the interest rate is high, investors like to hedge the risk and start investing in financial institutions. In such days, mediocre investors start withdrawing their money from the capital market. It posits a negative impact over the performance.

  1. Government Borrowings

Fed has to borrow money from the public, apart from the government bonds; they borrow the money through T-bills. Fed issues the T-bills for one year, before issuing the new bills; it has to retire the older ones by returning the money to the public along with the promised interest rate. It is the mere responsibility of fed to take care about the time duration otherwise the investors will start losing the trust on fed’s policies and will feel negative sentiments which will be elucidated through the stock market performance.

  1. Money Value

Fed has to sustain the value of dollar. If the value of dollar against other international currencies depreciates and the inflation rate increases, investors does not find it appropriate for their wealth. It is because growing inflation rate indicates the economic vulnerability all along.

  1. Economic Development

Increasing economic developmental and infrastructure projects are positive symptoms for the stock traders. If fed continues investing in new projects by taking the due care of community and society, it is a favorable sign for the investors. For instance, the recent unemployment fund cut off has created a very negative impact on the investors’ psyche, resultantly, seekers observed a smash in the market.

  1. Corporate Taxation and Subsidies

Taxes are the major part of government’s revenues. But incentives of several kinds of tax cut offs and subsidies are the source of investor friendly news. If the company has lesser tax payouts, they would be able to pay more dividends. For instance, they will get the value of their stocks increased. It will mobilize the stock market in two ways. First, the capital gain will be supported and second, the long term investors will get benefits of the government policies. It will remain a source of injecting the efficiency along the market.

About Emaad Qureshi