What will the withdrawal of fiscal policies do to financial markets?

It’s been roughly 2 years since the start of the Corona pandemic, one of the biggest events in modern society that has contributed to countless amounts of disparity and disruption in different markets. We’ve seen markets crash and go up, we’ve seen jobs being lost and created but we’ve also seen a lot of government bailouts recently. The federal reserve in the United States has been using quantitative easing to make sure financial markets don’t crash. They do this by buying up bonds from the private sector, this act fuels liquidity which is also one of the biggest contributors to the high inflation as well. While we could discuss if quantitative easing was the right decision, that’s not a question we can answer. However, one thing is for sure and that’s inflation being fueled by this decision. Prices of everyday goods and commodities have been skyrocketing because the fed is inflating the market with printed money, so what will happen if they stop? ForexTrading.uk discusses the topic below.

The fed will eventually have to withdraw quantitative easing

Yes, saving jobs is important and keeping companies alive is also a more humanitarian approach to solve the disruption in the markets. But there’s an opportunity cost, which we are starting to feel all over the world with the rising prices of everyday items. December 2021 the fed announced that they will aggressively dial back on their bond-buying from the private sector. This caused the interest rates to spike, but why?

Well, it’s actually very logical; if the markets are very liquid the access to cash is very large. This keeps the interest rates down because it gives the private sector and consumers the option to loan money for a cheap price. If the loan giver charges a higher right, you can simply choose another loan giver. However, if the markets aren’t that liquid the opposite is true; rates will go up because access to cash isn’t that high. If we compare the federal reserves balance sheet with the interest rates, we can see that this is true as well. This is important because it will affect the forex market heavily, so it’s important that you’re prepared for coming hikes and if you aren’t aware of how rates affect forex trading you can click here to access our forex trading school!

If you don’t know what quantitative easing is; it’s the practice where the central bank decides to buy up bonds from the private sector in order to fuel the market with more liquidity. Cash is the most liquid financial asset, therefore it will also cause the demand to artificially rise. This is why inflation is becoming a problem for most people today, with cases where people can’t afford gas or electricity.

Inflation is a problem, deflation is an opportunity

With the rise in costs of things we consume and produce it’s going to be harder for money to flow throughout the system. The velocity of money decides how much inflation lands at, if the velocity of money is low it means demand is dropping. If the markets are very liquid as well it will cause inflation to skyrocket because the supply of cash is too high. However, in a deflationary scenario where the demand stays as well as the supply of cash, you might think that the prices will stay the same. It won’t because the same dollar that bought you a certain item has a higher purchasing power today. This will cause the forex market to correct itself since the forex market is a 24/7 market where transactions happen all the time a deflationary scenario will show itself very quickly.

Nobody will ever be able to predict where the market is going, but one thing is for sure we must raise the interest rates or else inflation might go way too high. But there’re different strategies you could use to profit from deflation and inflation, and one of the most simple strategies include hedging in a different currency. This is how you can do this;

First, pick a respective currency to hedge against. For simplicity, we can choose the US Dollar. Institutions perform this hedge by taking out a loan in the respective currency to buy a more stable or growing currency in this case, you can use any currency of your choice or crypto. When the dollar loses value you can purchase back USD with the currency you own, but this time you get more dollars.

This is a very simple trick, you don’t need to take out a loan to perform it but if you’re a professional and have the ability to lose money you should look it up. You could also use a good broker with good tools that will help you decide your future trades;

 

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Capital (review) – Capital is a very popular platform amongst professionals and beginners, they offer a large variety of financial instruments you can trade on. Anything from cryptocurrency, to stocks and also a large number of different commodities like coffee beans, gold, palladium, and other rare stuff. Click here to start trading on Capital!

Published: Wed, 26 Jan 2022 21:24
Author: Robin Babaiy

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