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Situation of inflation Essay

Down side or lower real estate rates, volatility in stock market are the two basic reasons for changing the situation of inflation and this is not within the purview of FED. Fed monitors the liquidity in the market by providing tools viz. , cost of money and credit, how to operate in open market, discount rate and reserve requirements. Each tool of FED offers a length of benefits which are specific and limited. Investment in bonds and stocks are indirectly monitored by FED with the assistance of banking sector.

Bonds interest rates are controlled by Fed and stocks receive dividend and high share price as net worth of investment. Income from bond investments are taxable and although bonds carry safety, security and a fixed pattern of interest as income along with principal amount after a specified period of time. Many retired individuals often trust treasury bonds of U. S which yield high percentage of interest along with bond amount.

There is no question of volatility unless FED changes the pattern of interest rates whereas stocks are dependent on the situation of open financial market wherein the rise and fall of stock exchange index is not controlled by FED. In this case, even if FED is not revising monetary policy, bonds do not carry any risk whereas investments in stock carry both short-term and long-term risk in case if investments are not made with proper analysis of stock market and calculation of beta.

A switchover to stocks can always be made, depending on the trend of stock market. i. e. whether there is a gain in short-term stock market or long-term market at least with a forecast of 6-12 months, which either doubles the investment or at least with 50-60 percent margin, stocks should be ready for sale and even in this manner, quick decision should be made to avoid risk and loss of investment.

Reference How the Fed guides the monetary policy Accessed June 21, 2008 http://www. frbsf. org/publications/federalreserve/fedinbrief/guides. html

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