Investment analysts often referred to as Fed watchers, carefully monitor the actions of the Fed. Fed watchers believe that there are three factors that affect interest rates such as:
• The monetary policy of the FED
• The state of the economy
• The level of inflation
Since the monetary policy affects interest rates, it also affects the economic growth rate. Therefore by controlling the monetary policy the Fed influences the prices of all types of securities. Use the following assumptions to complete your assignment:
You work for a large domestic corporation as a Financial Analyst. You have been asked to evaluate the impact of the Fed’s policy and make recommendations about how the firm’s stock portfolio should be managed given the new policies.
• Economic growth has been average and is expected to improve.
• Unemployment is high but reducing slowly.
• The rate of inflation is approximately 4% per year, and has held steady over the last few years.
• Oil prices are increasing at a high rate.
• The dollar is weak.
• The Fed recently increased the interest rate by a quarter of a point.
The general consensus of economists is that the Fed will stimulate the economy and reduce the unemployment rate. You need to analyze the effects of Fed actions on the large portfolio of U.S. bonds held by your organization. If the Fed stimulates the economy your organization will be better off by switching to stock portfolio. There is also the danger of the Fed increasing the interest rates again. What action would you recommend? Why?
Using the assumptions and information contained in the case study, write a two to three page report for your supervisor outlining your findings and recommending a course of action.
The following options are available for your organization:
1. Switch to stock portfolio
2. Retain the bond portfolio