The responsibility of the Fed is to support the economy in the US to operate effectively.
The central bank of the U.S. has huge power to change the market sentiments, indirectly it operates the movements of the stocks.
The stock market has a role to play in the growth of the economy. Every investor must be ready to hear the news from the Fed to take any action in the stock market.
Impact of Fed Policies on Stock Market
As soon as Federal Reserve announced on Wednesday that, it is going to speed up its exit from the early adopted policies in the pandemic. And Purchases of assets will now be curtailed by 30 billion American dollars per month and possibly it may come to end in March. The stock market showed the rally.
This was the surprising event of separation from the prior plans of the federal reserve. In the first week of November, Fed revealed that it would slowly lower the purchase of assets from 120 billion American dollars monthly. As per the economy column of IBD, even though signals of federal reserve policies were hawkish in September, these signals showed relatively more aggression in the stock market than the investors were expecting.
In the rally, Dow Jones rose 1.1%. After recovering losses of more than 0.7%, the Nasdaq composite gained 2.1%. The Russell 2000 rebounded its initial losses to 1.6% upside. The S and P 500 was also up by 1.6%. Volume on Nasdaq was higher at the closing time on Tuesday.
Every sector was in the green zone after the Fed policy announcement except the energy sector which was in the red zone for 0.3%.
Market Response to Fed Actions
Investors always look forward and pay attention to every action of the Fed, and how it will impact the market.
Federal Reserve set monetary policies to stimulate the economy by various factors like reduction in interest rates, getting money in the hands of consumers to produce spending, buying bonds, etc. This action permitted faster growth in the economy and recovery.
Ultimately, the federal reserve wants to recover the economy. Everyone can understand it from policies. These Policies of the federal reserve encouraged liquidity in the equity market by inviting more people to invest in the stock market.
How Investors Can React to Fed Actions?
The positive sentiment on the market is also risky sometimes because the market can’t be positive always, it is going to consolidate or show the correction. Every investor should think of risk management and diversify the portfolio so that there is no risk of losses.
Investors should also consider the rising prices of goods and their impact on the market.