How on earth is the Fed affecting your wallet?

Over the past 19 years, the name Fed has appeared repeatedly in news searches-"the Fed has cut interest rates again and again" and "the Fed BOSS Powell has been attacked by Trump again."

There is a motto on Wall Street: "Don't fight the Fed." Playing the role of a central bank serving the world's largest economy, the Fed's every move will bring large and small shocks to the global capital markets and undoubtedly have an impact on the performance of all kinds of financial assets.

So how does the Fed work in the bond market? What will be the impact of its policies? What are the prospects for the bond market against a backdrop of successive interest rate cuts by the Federal Reserve? Next, Niuniu will deal with these complex problems.

If the Fed is compared to a medical team, then understand the bond world in terms of its "treatment" goals, means and effectiveness.

01 treatment target-financial stability

The purpose of the Federal Reserve is to maintain the stability of the US financial system. When there are "incubation symptoms" in the economy, the Federal Reserve should formulate a corresponding plan to eradicate the "root causes" of the financial crisis in time, prevent the United States from entering a stage of economic recession and achieve steady economic growth.

02 important means of treatment-raising / lowering interest rates

The Fed has a variety of medicine kits, the most well-known of which are interest rate hikes / cuts, known scientifically as "adjusting the Federal funds rate (Federal funds rate)". When the economy is too hot or too cold, this kind of monetary policy is often adopted in order to curb inflation or deflation. Its most direct and pure result is to reduce / increase the total amount of money in the market, further affecting consumption, investment and the national economy. Interest rate hikes / cuts will indirectly lead to the rise and fall of market interest rates, which will have a far-reaching impact on the bond market.

03 therapeutic effect-shaking the bond market

In the vast majority of cases, the "ailments" of the economy are so complex that the Fed's prescriptions are likely to have diametrically opposite effects on different financial sectors, with unpredictable complications. But for global bond markets, there is no element that is more likely to trigger an earthquake than the Fed's monetary policy.

Generally speaking, there is a negative correlation between interest rates and bond prices-bond prices rise when market interest rates fall, and vice versa. From the point of view of supply and demand, if the central bank raises interest rates, deposit yields will rise, and people are more willing to put money into less risky banks, where money flows from the bond market to banks, so bond prices fall.

In this way, when the Fed cuts interest rates, bond prices will rise and bond markets will benefit.

04 the cycle of global interest rate cuts starts the attack of bull bonds?

Since the beginning of last year, a number of central banks have cut interest rates one after another, and the global interest rate reduction cycle has begun. And the Fed, the big brother of the world's central banks, is doving everywhere.It is expected that due to the impact of the COVID-19 epidemic, the benchmark interest rate will be further reduced.

Throughout the six recessionary interest rate cuts in American history, bond assets have performed well and achieved higher positive returns.

Both theoretically and historically, the arrival of the interest rate cut cycle will bring more vitality to the global bond market, and in the context of the Fed's release of pigeons, smart investors will certainly judge the situation and grasp the direction of the Fed. Dig a bucket of gold in the financial markets.