So where the Fed has historically used a stick, it now intends to use a carrot. Rather than increasing the cost of acquiring reserves, the Fed will be increasing the cost of forgone opportunity. In both cases, the goal is to discourage lending by making the risk less profitable. The primary difference this time around is the $2.5 trillion in excess reserves sitting between the banks’ ability to lend and their reserve requirement threshold.
With QE tapered out and rate hikes seemingly in the forecast, act one of this unprecedented Fed policy experiment appears to have reached intermission. Investors will no doubt keep a close eye on whether or not the carrot can be as effective as the stick when the curtain opens on part two.
In the absence of a clear roadmap to help investors navigate the implications of Fed policy on fixed-income markets, the investor’s toolbox takes on greater importance. The liquidity1, flexibility and transparency2 of fixed-income exchange-traded funds (ETFs) may help investors be responsive to changing conditions as they develop.
Important information
1 Since ordinary brokerage commissions apply for each buy and sell transaction, frequent trading activity may increase the cost of ETFs.
2 ETFs disclose their full holdings daily.
There are risks involved with investing in ETFs, including possible loss of money. Index-based ETFs are not actively managed. Actively managed ETFs do not necessarily seek to replicate the performance of a specified index. Both index-based and actively managed ETFs are subject to risks similar to stocks, including those related to short selling and margin maintenance. Ordinary brokerage commissions apply.