The Bureau of Labor Statistics’ October jobs report, which was surprisingly strong in spite of October’s government shutdown, is probably going to refuel speculation about when the Federal Reserve plans the so-called “taper” — a slowing of the pace at which it buys long-term assets.
Now, this news likely produced one of two reactions from you.
Either a gaping yawn signaling indifference, or a scratch-of-the-head indicating your confusion.
While I’ll admit following the goings-on of our nation’s central bank can get a tad dry — and complex — having a basic understanding regarding the implications of the Fed’s policy behavior can be helpful.
Why?
For one, the Fed plays a direct role in impacting University student’s day-to-day economic well-being.
Think along the lines of money supply, interest rates and inflation.
Founded in 1913, the Fed typically takes responsibility for our nation’s short-term economic goals by influencing the direction of interest rates to control our money supply.
In other words, the Fed is in charge of promoting the goals of stable prices and maximum employment.
Say, for instance, the economy goes into a recession, as it did in 2008-10, with unemployment rising beyond an acceptable level. How would the Fed react?
When our economy is experiencing slow growth, the Fed buys government securities, which increases the money supply.
For those who haven’t taken an economics course, the money supply is basically the total money in circulation in a country.
These purchases, in turn, lower interest rates, which spur economic development and normally cause inflation to rise. The opposite occurs when the Fed sells government securities.
It should make sense why lower interest rates — the cost of borrowing — help create positive economic activity. Firms are more likely to build new factories and hire workers when they can do so cheaply.
This logic follows similarly to those looking to purchase a home or a car.
When the Fed signals it is looking to increase the money supply and lower interest rates, now is the time to buy, because locking in a mortgage or auto loan at 3 percent compared to one at 5 percent can potentially save you thousands of dollars on the cost of the asset.
Lately, however, as we’ve seen our economy recover from the Great Recession, the Fed has signaled that it will be taking the opposite course of action.
Indeed, this is where the previously-mentioned taper-talk comes into play.
With interest rates still at rock bottom levels since 2009 and an economy beginning to heat up, the Fed is worried that inflation will increase beyond undesirable levels.
As a result, the Fed is contemplating a time frame for a massive sell-off of government securities, thereby decreasing the money supply.
Consequently, this sell-off will raise interest rates, slowing the economy down a bit, to stabilize the expected rise in inflation.
How should University students take the Fed’s new emphasis on combatting inflation?
If you’re planning on buying a car or taking out a mortgage on a new home, do it now, because any long-term investment that requires interest financing is about to become a lot more expensive if the Fed proceeds with tapering.
On the other hand, with inflation edging lower, students’ purchasing power will increase, so we will be able to afford a larger basket of goods and services.
So, as you can see, learning the basic terminology of a central bank can pay huge dividends, if you can align your purchase behavior with Fed action.
Watch out, Tigerland, our wallets may just be getting a little bigger.
Jay Meyers is a 20-year-old economics Junior from Shreveport.