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Volume 1 | Issue 1

April 13, 2017 Federal Reserve Review


As the economy
Recent Federal Reserve activities have resulted in a relative increase
approaches our
in market volatility. Such behavioral activity has shown to be
objectives, it makes
consistent since the Feds inception, and is a subject of intrigue to
sense to gradually
domestic and international financial institutions alike.
decrease our level of
monetary support.
Impending Interest Rate Hikes
-Janet Yellen The Federal Reserve Board recently announced a long awaited decision to raise interest rates on
the dollar. The floating interest rate has been raised to a range of .75 to one percent.

This move marks just the third rate increase since the financial crisis of 2009. This rate increase
The CBOE volatility is one of three planned by the Federal Reserve for 2017. Shown above is a market summary from
December 14, 2016, when the Fed first announced the rate hikes would take place. This supports
index, widely
the theory that the Federal Reserve causes an increase in instability.
considered to be the
most effective Market Volatility on the Rise
predictor of volatility Predicted by analysts to be the result of interest rate hikes, volatility in the stock market is
increasing. The CBOE volatility index, widely considered to be the most effective predictor of
in the market, rose 5% volatility in the market, rose 5% this past week. This marks the third consecutive week wherein
volatility has risen. A strong correlation has been seen between volatility and interest rate hikes.
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The market
overall is still CNBC: Fed Should Act Predictably to Avoid Big
taking an optimistic Market Moves
view, hence getting Feds plan for shedding $4.5 trillion in bonds
the policy mix right In an interview with CNBC, International Monetary Fund (IMF) director Tobias Adrian stated that
the Federal Reserve should act predictably when beginning to sell excess treasury bonds on their
is crucial for balance sheet for the current fiscal year. The IMF head used economic uncertainty abroad, in
places such as Europe with the looming debt crisis as reasons. It is believed that the U.S. should
financial stability limit as much volatility as possible, as investors are currently already facing heightened risk
going forward abroad. The Federal Reserve will begin open market operations, where bonds can be bought and
sold.

-Tobias Adrian, Worldwide Outlook Trending Toward Stability


IMF While Adrian claimed that the IMF was not necessarily worried about volatility, a concession was
made that the global economy is in a state wherein it is more vulnerable to volatility, making it all
the more important that the Federal Reserve acts more predictably. A recent report by the IMF
claims that the global economy should see an increase in stability over the coming years as
markets recover from recent shocks.

Figure 1CBOE Volatility Index Level, meant to measure approximate market volatility.

Closing Summary:
Expect Federal Reserve to Continue with Schedule Monetary Policy Changes
With international pressure mounting and investors becoming more weary, it seems unlikely that
the Federal Reserve would intend to fluctuate interest rates beyond what was already expressed.
The global economic climate is still riddled with uncertainty. The Federal Reserve can counteract
this uncertainty by showing faith in the American Economy.
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