The Fed’s Decision: An Understandable Translation

Dec 18, 2013 | by Franck Cushner, CFP®

The Fed’s Decision: An Understandable Translation

Essentially, the Fed is letting the economy slowly work itself back to normal.  It’s a common misconception that the state of the economy is at a decline.  It’s not.  It’s certainly growing, and that’s why the Fed is reducing their monthly buying of bonds by $10 Billion, from $85 Billion to $75 Billion. 

Through buying public bonds, the Federal Reserve dumps money into the economy, stimulating economic growth.  With that, Inflation has hovered lowly around 0%, and the unemployment rate has ever-so-slightly dropped.

 

These are a few of the key goals of the taper:

      Inflation has dropped well under the 2% target, and this will hopefully gradually return inflation rates to the 2% objective in the next few years.

      A rise in the country’s GDP.  After this taper, the GDP is expected to finish the 2013 year at 2.3, and climb to 3.2 by the end of 2014.

      Continue to lower the currently unemployment rate of 7%.  The goal for 2014 is to drop under the threshold of 6.5%, and eventually drop to 5.8% by 2016.

 

Although it seems that interest rates would significantly increase, the Fed expects a slow, short term rise in interest rates.

In terms of affecting today’s markets, the Dow Jones Industrial Average is on track to close at a record high of nearly 16,100. 

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