The ultimate goal of the central bank is to foster healthy economic growth by their use of monetary policy.  Although central banks like the US Federal Reserve never claim to directly steer the stock market, their policies have a huge affect on it.  Here is how they act and the roles they play and how they can affect finding good stocks to buy for your portfolio.

Monetary policy usually takes the form of controlling inflation and the money supply.  In the US, the Fed no longer really tries to control money supply.  For a variety of reasons, they don’t find it as important as controlling inflation through interest rates.

It’s amazing how the stock market reacts to even the slightest hints by the Federal Reserve.  This is how both sides want it.  The Fed wants to send clues to the markets of what they plan to do before they do it.  They do this because they don’t want sudden shocks in the financial markets, which can potentially make them unstable.

One of the things that is going on right now is the Fed is printing money and injecting it into the economy.  They are doing this to stimulate the economy.  But many fear they are doing this at the risk of rising inflation, which is indeed occurring albeit at a small pace.

What I think Ben Bernanke is really afraid of is deflation, which can have a spiraling affect and keep us in a recession for much longer.  In an effort to fight this, he is keeping interest rates super low and printing US dollars.

This has had the affect of devaluing our currency, at the same time causing the stock market to rise.  They have been in an inverse relationship for some time now, since the beginning of the financial crisis.  They will probably continue to have that inverse relationship until the economy is officially strong and stable.

You can keep track of this and other developments at Finance World.  There are lot of great resources for investors there as well as a deeper discussion about monetary policy and the Fed.

Filed under: General Options Trading Information

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