Your Business Matters! : The Fed and Monetary Policy

YES! Your Business Matters

The Fed and Monetary Policy -

Where do we go from here?

If you feel you’re a victim of the economy and want to take control of your fortunes, you might want to know how changes in the Feds policy can and will affect your business. You need to read up because this is a big step, or turning point, in the economic recovery process. Not only for residents of the U.S. but many parts of the world are affected by the Feds actions.

It has been a long, slow process - 5 years and counting (capital ($), leverage($$), debt($$$)) to bring the global economy back to near normal - historically speaking. There have been many changes in government policies, laws, and financial market regulations. If the Fed, QE, and Monetary Policy are not your specialty, a recap on economic basics should shed some light on recent Fed policy events.

1) How does The Fed's Monetary Policy impact our economy?

The Fed’s monetary policy can affect the supply of loanable funds available in financial markets and therefore may affect interest rates. It may also affect inflation and the demand for loanable funds by encouraging inflationary expectations.

*This is important if you’re looking to expand your business, especially if interest rates are about to increase. It is vital to keep your cost of capital, debt & equity, less than your return on equity. When you make capital expenditures you can calculate your economic value added by taking your net profit after tax (NOPAT) minus your (cost of capital times the increase in balance sheet asset investments for the year).

EVA = NOPAT - (Cost of capital x Capital expenditures)

2) What are the trade-offs of Monetary Policy?

A stimulative monetary policy can increase economic growth and reduce unemployment, but may increase inflation. A loose monetary policy can be used to stimulate the economy, especially if inflation is not a concern.

*This was termed Quantitative Easing (QE) when the Fed buys and increases the money supply. There were 3 series of QE sessions since the recovery began.

A restrictive monetary policy can keep inflationary pressure low but may cause low economic growth and higher unemployment. A tight monetary policy may result in higher interest rates, reduced borrowing, and reduced spending to an excessive degree.

*Inflation correlates to an increase in prices and a reduction in the value of the dollar.

What does inflation mean to you?

If you are interested in learning more about the Federal Reserve, the FDIC, or any of the Federal Departments, there are a host of links. Feel free to contact me on G+ with your questions. In your best interest!