The Finatical

Week of November 29th, 2022 - Open Market Operations, Wholesale Prices, Rent Growth Slows

Finatic

Aditya Bagga

Ksheeraj Sanga

, and 3 others

Nov 29, 2022

Introduction

The Federal Reserve engages in what is known as "open market operations" when it purchases or sells government bonds and other assets from its banks. Open market operations are one of the main instruments the Federal Reserve uses to raise or cut interest rates. According to the Federal Reserve, “Open market operations (OMOs)--the purchase and sale of securities in the open market by a central bank--are a key tool used by the Federal Reserve in the implementation of monetary policy.” So now we know that open market operations are definitely important, but how exactly do they work?

How Do They Work?

The Fed may alter market conditions and the economy by purchasing and selling assets. The Fed sells securities to banks when it wants interest rates to increase. Its implementation aims to stabilize economic growth and curb inflation, and this is what is happening today when the Fed is trying to get inflation under control. But during an economic slowdown, such as the one we witnessed around 2020 with COVID, the Fed purchases securities since it wants interest rates to decrease. The purpose of this is to promote economic development since if interest rates are lowered, it's easier to borrow money and easier to spend money. Spending money will thereby better the economy. The Fed provides credit to a bank's reserves by purchasing government securities from the bank. Despite not being real money, it is handled the same and has the same result. It is comparable to a direct deposit that your company may make into your bank account. As a result, the bank has more cash available to lend to customers, who can use it any way they choose, and this will once again promote economic growth.

Taking Advantage

So you might now be wondering how you can take advantage of open market operations. Well, we know that open market operations enable the Federal Reserve to control interest rates, so the Fed may influence interest rates by putting money into the economy or pulling money out of it. In addition to helping the economy, the Fed's activities also have the potential to help you with your own purchases. You may wind up getting a better deal on your mortgage if you were going to buy a home soon and the Fed employed open market operations to lower interest rates. Taking advantage of open market operations can therefore save you money and give you better returns on your investments! But keep in mind, you probably wouldn’t want to buy a house with a mortgage when the Fed is using open market operations to raise interest rates.

Financial Trends

Wholesale Prices Rise Minimally As Inflation Eases

According to a report by the Bureau of Labor Statistics, wholesale prices increased less than their expected growth in October, adding to the hopes of declining inflation. The producer price index (a measure of the prices that companies receive for finished goods in the marketplace) rose by 0.2% for the month, while the Dow Jones estimated a 0.4% increase. A significant factor in slowing down the rate of inflation was a 0.1% decline in the services component of the index. This led to the marking of the first outright decline in this measure since November 2020. However, as they say, in order to win some you have to lose some. The deceleration in wholesale price decrease came at the cost of a 2.7% increase in energy costs and a 0.5% increase in food.

Inflation soared during the peak of the pandemic as supply chains struggled to keep up with overbearing demands for big-time wholesale items, particularly those dependent on semiconductors. Usually, economists expect that inflation has at least plateaued and will not exceed higher levels, despite risks remaining persistent, such as a potential rail strike that would add to the pressure on supply chains. The producer price index is typically considered to be a good leading indicator for inflation as it detects pipeline prices that eventually transition into the marketplace. Markets also soared following the release of the producer price index coupled with the Fed raising interest rates in hopes of bringing down inflation.

Rent Growth Slows To The Lowest Level In 18 Months

The red-hot rental market in the U.S. is showing signs of cooling off along with the rest of the housing market. Despite rents being higher than they were a year ago, the gains are shrinking with landlords losing power in pricing due to inflation scaring away customers. According to Danielle Hale, chief economist at Realtor.com, “Our data indicates that we are finally starting to see a bit of relief from the double-digit pace of rent growth that we experienced during the height of the pandemic”. A smaller margin of landlords has stated that they will continue to increase rent prices over the next year with more tenants having difficulty affording the high rent prices.

Rent growth has annually been slowing down for nine months straight and has dropped into single-digit levels for the past three months, but rents are still growing faster than just before the start of the pandemic. The pressure on multifamily rents is creating pressure for both builders and investors, with families considering moving due to affordability. The number of multifamily units under construction is at its highest level in over 50 years with construction spending continuing to increase but developers are starting to notice signs of a housing market slowdown. The NAHB is now projecting there to be a significant decline in multifamily construction in 2023 with the hope that rent growth will continue to decline.

Financial Guidance

“Our greatest glory is not in never failing, but in rising every time we fall.” — Confucius

Investing and financial decisions don’t always pay off, and can often fail. However, what matters is not the fact that it didn’t work out, but rather how you chose to respond to it and not give up.

Term of the Week

Bonds- Bonds are a type of security where the issuer receives a loan from the buyer of the bond, and they agree to pay back the buyer the loan, along with a certain amount of interest over a period of time.