Monetary policy is a complex topic. But, it’s important and it affects everyone.
LPL Financial’s Jeff Kleintop offers an extremely approachable analogy to explain monetary policy in his latest Weekly Market Commentary note.
Specifically, he compares the Federal funds rate with average NASCAR speeds. Under normal conditions, NASCAR drivers drive pretty fast. However, after a wreck, a safety car comes out to slow things down until it’s safe to get back to full speed.
Similarly, the Fed funds rate is usually much higher than it is now. However, after an economic or financial shock, the Fed (i.e the safety car) will come in and lower the Fed funds target rate (i.e. the speed limit). When the economy gets on stronger footing, the Fed allows rates to rise again.
Here’s a Kleintop’s chart putting the Fed funds rate on top of NASCAR speeds during last year’s Daytona 500:
Photo: LPL Financial