Monetary Policy and Investment Opportunities

By Laura S. Nowak | Go to book overview

8
The Effect of Monetary Policy on Particular Industries and Companies

We have seen in Chapter 5 that Federal Reserve monetary policy impacts on corporate stocks and bonds, government securities, money market securities, real assets, and other investments as well. The impact flows primarily through the Fed's effect on 1) interest rates, 2) inflation, and 3) the value of the dollar in foreign exchange.

Monetary policy, however, does not affect all industries and companies equally. Industries and companies that are interest rate sensitive are more severely affected than those that are less sensitive to changes in interest rates. Industries and companies that are also sensitive to inflation will be more affected by monetary policy than others. Lastly, industries that have a substantial export or import component to their profit picture will be affected by monetary policy that impacts on the value of the dollar in foreign exchange.

For example, industries that have a large export component to their total sales will benefit when the value of the dollar declines because American goods and services are cheaper to foreign buyers when the value of the dollar declines. On the other hand, firms will lose sales when the value of the dollar rises because American goods and services will be more expensive. Industries that import raw materials for use in the manufacturing process or import finished goods for sale in the United States benefit when the value of the dollar rises because a rising dollar allows them to purchase more foreign-currency-denominated imports for the same amount of dollars. Of course, the opposite occurs when the value of the dollar declines.

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