Watch the Fed!
by Arthur A. Merrill
The actions of the Federal Reserve are vitally important to investors and speculators. When the Fed
tightens the money supply, interest rates rise, bonds and stocks fall. The reverse occurs when the Fed
eases the supply of money.
Most of the federal policy decisions are made behind closed doors at meetings of the Federal Open
Market Committee (FOMC), held in Washington eight times a year. The committee uses weekly reserve
targets to determine strategies for the future.
"Fed Watchers," I'm sure, would like to bug the committee meetings. However, as second best, they
watch the actions of the account manager at the "open market desk" in New York. This manager tries to
implement the planned strategy with "open market operations" designed to neutralize seasonal and
random credit changes and achieve the reserve targets established by the FOMC. He can ease the supply
of money and the bank reserves by buying Treasury and agency securities in the open market and
crediting the reserves of the sellers. He can drain reserves and tighten money by selling securities in the