Economics you need to understand before clicking BUY/SELL button
How does FED affect money supply?
Before, we get into our main topic, we just wanted to clarify a small common misconception. Quick answer to the question above is the monetary policy; however, a lot of people confuse monetary and fiscal policies or use the terms interchangeably. Indeed, both are macroeconomic tools used to stimulate/slow down the economy. Interest rates and the amount of money in circulation are dealt with by monetary policy, which is usually administered by a central bank (a.k.a. FED). Taxation and government expenditure are addressed by fiscal policy, which is mostly controlled by government law.
Now that we clarified this small moment, let’s get back to our main topic. Central banks have always utilized monetary policy to either boost or restrain an economy's growth. The goal of monetary policy is to stimulate economic activity by motivating people and firms to borrow and spend. Monetary policy, on the other hand, may serve as a brake on inflation and other ills associated with an overheated economy by constraining expenditure and rewarding savings. To impact the economy, the Federal Reserve has regularly employed three policy tools: open market operations, adjusting bank reserve requirements, and setting the discount rate. The Federal Reserve buys and sells U.S. government bonds on a daily basis in order to either pump money into the economy or remove money from circulation. The Fed directly controls the quantity of money generated when banks issue loans by adjusting the reserve ratio, or the proportion of deposits that banks must maintain in reserve. Changes in the discount rate (the interest rate the Fed charges on loans to financial institutions) can also be targeted by the Fed, with the goal of influencing short-term interest rates across the economy. A picture above would be a great illustration of the process.
Why is this important for traders?
Let’s face the reality, most traders fail to lack of education. All they see are bars and wicks. Profitable traders see economical trends, which are backed by real time tendencies in the whole economy (if we cancel out the noise and speculations). If you understand the mechanism behind money, it’s 100x times easier to make it.
Note: Our article doesn’t imply that fiscal policy isn’t as important to market as the monetary one, even though it’s important to understand that fiscal policy takes months/years to get passes and have any effect on the economy, meanwhile monetary policy swifts the sentiment overnight.
Before, we get into our main topic, we just wanted to clarify a small common misconception. Quick answer to the question above is the monetary policy; however, a lot of people confuse monetary and fiscal policies or use the terms interchangeably. Indeed, both are macroeconomic tools used to stimulate/slow down the economy. Interest rates and the amount of money in circulation are dealt with by monetary policy, which is usually administered by a central bank (a.k.a. FED). Taxation and government expenditure are addressed by fiscal policy, which is mostly controlled by government law.
Now that we clarified this small moment, let’s get back to our main topic. Central banks have always utilized monetary policy to either boost or restrain an economy's growth. The goal of monetary policy is to stimulate economic activity by motivating people and firms to borrow and spend. Monetary policy, on the other hand, may serve as a brake on inflation and other ills associated with an overheated economy by constraining expenditure and rewarding savings. To impact the economy, the Federal Reserve has regularly employed three policy tools: open market operations, adjusting bank reserve requirements, and setting the discount rate. The Federal Reserve buys and sells U.S. government bonds on a daily basis in order to either pump money into the economy or remove money from circulation. The Fed directly controls the quantity of money generated when banks issue loans by adjusting the reserve ratio, or the proportion of deposits that banks must maintain in reserve. Changes in the discount rate (the interest rate the Fed charges on loans to financial institutions) can also be targeted by the Fed, with the goal of influencing short-term interest rates across the economy. A picture above would be a great illustration of the process.
Why is this important for traders?
Let’s face the reality, most traders fail to lack of education. All they see are bars and wicks. Profitable traders see economical trends, which are backed by real time tendencies in the whole economy (if we cancel out the noise and speculations). If you understand the mechanism behind money, it’s 100x times easier to make it.
Note: Our article doesn’t imply that fiscal policy isn’t as important to market as the monetary one, even though it’s important to understand that fiscal policy takes months/years to get passes and have any effect on the economy, meanwhile monetary policy swifts the sentiment overnight.