The US Federal Reserve is the central bank of the United States. It is the lender of last resorts. They also happen to control the money supply. This has a huge impact on the economy and on the stock market. If you want to know how to invest in stocks effectively with the Fed’s monetary policies, you need to understand how interest rates work. You should also get a historical perspective as well.
Basically, the Fed is responsible for the business cycle. They are usually the ones that start the recession and they are the ones that create bubbles. Here is how this works.
Whenever the economy is not doing well, they will lower interest rates. In extreme cases like right now, they will actually inject more liquidity into the economy. In other words, they print money and put it into circulation. When they do this, borrowing costs go down and money is distributed liberally. Eventually, this drives up asset prices and creates a bubble. We all know what happens when a stock market bubble pops. That’s right, a recession starts.
When you see the Fed lower interest rates, watch for a bubble to form. Then sell as soon as you think it will pop. You don’t have to be exactly on the mark to make money.
