Last month, Federal Reserve Chairman, Ben Bernanke set the markets off after talking about limiting quantitative easing. Fascinating isn’t it? Especially since many Americans aren’t sure exactly what Ben Bernanke does and who on earth knows what quantitative easing is? No need to worry, we’re here to help. It turns out that Mr. Bernanke and actions taken by the Federal Reserve have more of a significant impact on your life than you might think. We’ll break it down so that you understand exactly this announcement could affect the United States economy.
Ben Bernanke: As the Federal Reserve Chairman, Bernanke is in charge of the central banking system of the United States and is the executive officer of the Board of Governors of the Federal Reserve System. The Fed is considered an independent central bank because they do not require presidential or executive branch approval. By law, Bernanke must report to Congress twice a year on the Fed’s activities and he testifies on various other financial issues. Bernanke also meets periodically with the secretary of the Treasury and the president of the United States. Essentially, Bernanke is in charge of the banking system in America but has to answer to the big wigs.
Quantitative Easing: This one is a bit more difficult to explain, are you ready? Depending on the current state of the United States economy, the Fed will interact in various ways in order to get the economy moving. In this case, the Fed has seen enough of an improvement in the economy that they want to cut back on how much they are interfering. They will slowly reduce the $85 billion they have been spending per month in bond buying. This part of quantitative easing affects how much money is circulating in the American economy.
Why Did the Markets React? Stocks and treasuries took a dive at the thought of a bond buying slowdown. Stock market investors got nervous. They feared that a slow down of the Fed’s intervention would mean a slow down in economic growth. Not wanting to be caught in the middle of that, they took action.
Now What? Bernanke only announced potential moves by the Fed. He did not announce official policy change. He promised that the actual direction of the economy would be what drove the actual action of the Fed. It is interesting to note that since the stock market was affected by the announcement of potential action by the Fed, it means that much of the stock market is being driven by speculation, which is nothing new.
What does it All Mean? It means that if the Fed does slow down its quantitative easing, the best economic minds in the U.S. think that our economy is far enough down the road to recovery that they don’t need to interfere anymore. If they don’t end up slowing down their quantitative easing it means that they think we aren’t in the clear yet and that it could be some time before America has a strong and independent economy.
Kamiel Moore is a blogger for HomeVestors, America’s #1 homebuyer. She loves cupcake shops, reality television, and using her passport when she goes on vacation.