This month, Jason Weaver discusses the tools of the federal reserve, world interest rates and components of the bond index.
Tools of the Federal Reserve
There are many tools that the Federal Reserve uses, but four of the most common are:
Open Market Operations
Buying & Selling Government Securities
Discount Rate
Interest rate charged by Fed to banks on ST loans
Reserve Requirements
Portions of deposits that banks must maintain in their vault
Overnight Reverse Repurchase Agreements
Fed sells a security to an eligible counterparty and simultaneously agrees to buy the security back the next day
Currently being used to help keep the federal funds rate in the target range established by the FOMC
World Interest Rates
Global interest rates remain historically low as economies reopen
Of advanced economies, the US has the highest rate, but has been rangebound for several months
Global central banks will continue monitoring inflation, growth, and
spread of new COVID variants as they determine policy shifts
Components of the Bond Index
The “AGG” is a broad-based benchmark that measures the US Investment Grade, fixed-rate taxable bond market.
Meant to simulate the universe of bonds in the market
Includes
– Treasuries
– Government-related and corporate securities
– MBS
– ABS
– CMBS
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