Economics Homework Help

 

There is discussion now that the new fed chairman has a very loose/liberal money policy given the COVID 19, what do you think would the effect of such policy on the time value of money and value of stocks versus bonds. Would you be interested in investing more in stocks or bonds as a result of such a policy and should that be a function of your age?

 

first student respond 

The discussion about the Fed’s monetary policy is always front and center in financial news, and this holds true now more than ever.  Jerome Powell, the Federal Reserve Chairman, has received many accolades for his handling of the monetary policy during the Covid-19 pandemic, one of the worst economic blows in history.  He not only made it easier to borrow money across the board but he also maximized bond buying significantly to ensure the market would have plenty of cash available.  Even though there was no guarantee about how long the lockdowns would last and whether they would lead to a severe depression, the Fed’s swift and decisive action helped ensure the damage was minimized as much as possible. While this action has had the effect of ensuring the economy can bounce back quicker, there is a possibility that the economy is coming back too fast, and this may have dramatic effects on inflation.  Inflation, at least at first coming out of the pandemic lockdown, was a positive indicator that the economy was emerging successfully.  However, this can quickly get out of hand and cause hyperinflation, which is extremely bad for safer investments such as bonds and real estate which could see negative returns (returns after inflation is accounted for).  Jerome Powell’s resistance to acknowledge the potential for hyperinflation is now being discussed as too liberal, and calls are being made to raise interest rates and keep inflation in check.  His policy now is directly connected to the unemployment rate, which is still higher than before the pandemic.  To get to pre-pandemic employment levels before adjusting the monetary policy could be too late and allow hyperinflation to become a reality.  

second student respond 

The new fed chairman has the right idea in terms of making it easier to borrow money as it helped the economy survive or rather bounce back during these trying times however there is a possibility his actions could ultimately cause inflation if the economy comes back too fast. In regards to which is a better investment based on policy, I would say bonds are debts while stocks are stakes of ownership in a company. Because of the nature of the stock market, stocks are usually riskier short term, given how much money the investor could lose pretty much overnight. However, long term, stocks have historically proved to be very valuable. On the other hand, bonds usually operate off of fixed interest rates that the entity buys from the investor, which will then usually pay out annual interest rates to investors while repaying the amount in full at a given time. For this reason, the general public as well as I would consider bonds considered a safer investment in the short term or for new investors.