Study guide
1.2 Monetary Policy
Series 65 Uniform Investment Adviser Law
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1 Introduction
About the Series 65 How to Use This Guide
2 Chapter 1: Economic Factors & Business Cycles
1.1 Business Cycles 1.2 Monetary Policy 1.3 Fiscal Policy 1.4 Inflation & Deflation 1.5 Interest Rates & Yield Curves 1.6 Global Economic Factors
3 Chapter 2: Financial Reporting & Analytical Methods
2.1 Financial Statements Overview 2.2 Accounting Fundamentals 2.3 SEC Filings & Annual Reports 2.4 Financial Ratios 2.5 Time Value of Money 2.6 IRR and NPV 2.7 Descriptive Statistics
4 Chapter 3: Types of Risk
3.1 Systematic (Market) Risk 3.2 Unsystematic (Company-Specific) Risk 3.3 Interest Rate & Reinvestment Risk 3.4 Inflation & Currency Risk 3.5 Liquidity Risk & Opportunity Cost 3.6 Risk Measurement & Portfolio Theory
5 Chapter 4: Cash Equivalents & Fixed Income Securities
4.1 Cash & Cash Equivalents 4.2 Treasury Securities 4.3 Agency Securities 4.4 Corporate Bonds 4.5 Municipal Bonds 4.6 Bond Pricing & Yields
6 Chapter 5: Equity Securities
5.1 Common Stock 5.2 Preferred Stock 5.3 Shareholder Rights & Corporate Actions 5.4 Equity Valuation Methods 5.5 ADRs, REITs & Other Equity Securities
7 Chapter 6: Pooled Investments
6.1 Mutual Funds 6.2 Mutual Fund Costs & Fees 6.3 Exchange-Traded Funds (ETFs) 6.4 Closed-End Funds & UITs 6.5 Hedge Funds & Private Equity
8 Chapter 7: Derivatives, Alternative Investments & Insurance Products
7.1 Options Basics 7.2 Options Strategies 7.3 Alternative Investments 7.4 Annuities 7.5 Life Insurance Products
9 Chapter 8: Client Types & Profiles
8.1 Individual Clients 8.2 Business Entity Clients 8.3 Trusts & Estates 8.4 Accredited & Qualified Investors 8.5 Suitability & Know Your Customer
10 Chapter 9: Portfolio Theory & Capital Markets
9.1 Modern Portfolio Theory 9.2 Capital Asset Pricing Model (CAPM) 9.3 Efficient Market Hypothesis 9.4 Risk & Performance Measures 9.5 Asset Allocation
11 Chapter 10: Portfolio Management Strategies
10.1 Investment Styles 10.2 Portfolio Management Techniques 10.3 Fixed Income Strategies 10.4 Return Calculations
12 Chapter 11: Tax Considerations & Retirement Planning
11.1 Capital Gains & Investment Taxes 11.2 Retirement Plans Overview 11.3 Individual Retirement Accounts (IRAs) 11.4 Education Savings Plans 11.5 Distributions & RMDs
13 Chapter 12: ERISA, Special Accounts & Performance Measures
12.1 ERISA Requirements 12.2 Special Account Types 12.3 Performance Measures & Reporting 12.4 QDROs & Special Situations
14 Chapter 13: Regulation of Investment Advisers
13.1 Investment Advisers Act of 1940 13.2 Registration Requirements 13.3 Recordkeeping Requirements 13.4 Custody Requirements 13.5 Exempt Reporting Advisers
15 Chapter 14: Regulation of Investment Adviser Representatives
14.1 IAR Definition & Requirements 14.2 Registration & Post-Registration 14.3 IARs of Federal Covered Advisers
16 Chapter 15: Regulation of Broker-Dealers & Agents
15.1 Broker-Dealer Definition 15.2 Agent Registration 15.3 Regulation Best Interest
17 Chapter 16: Securities Registration & Exemptions
16.1 Uniform Securities Act 16.2 Securities Registration Methods 16.3 Exempt Securities 16.4 Exempt Transactions
18 Chapter 17: Communications & Client Relationships
17.1 Advertising Rules 17.2 Social Media & Electronic Communications 17.3 Client Agreements & Disclosure 17.4 Proxy Voting & Other Obligations
19 Chapter 18: Ethics & Fiduciary Obligations
18.1 Fiduciary Duties 18.2 Prohibited Practices 18.3 Senior & Vulnerable Adult Protection 18.4 AML & Compliance Programs
1.2 Monetary Policy
Key Takeaways Explain This Topic AI
The Fed targets maximum employment and price stability.
FOMC sets the federal funds rate target.
Changing the federal funds rate target is the Fed's primary policy lever.
Buying securities is expansionary; selling is contractionary.
Bond prices move inversely to interest rates.
Last updated: October 2026
Monetary policy is one of the most powerful forces affecting securities markets. Investment advisers must understand how the Federal Reserve's actions influence interest rates, asset prices, and the overall economy to make sound recommendations for their clients.
What Is Monetary Policy?
Monetary policy refers to actions taken by the Federal Reserve (the Fed) to influence the money supply, credit conditions, and interest rates to achieve economic objectives. Unlike fiscal policy (controlled by Congress and the President), monetary policy is managed by an independent central bank.
The Federal Reserve System
The Federal Reserve is the central bank of the United States, established in 1913 following a series of banking panics.
Structure of the Fed
- Component Role
- Board of Governors 7 members appointed by the President, confirmed by Senate; 14-year terms
- 12 Regional Federal Reserve Banks Serve as operating arms; provide banking services
- Federal Open Market Committee (FOMC) Sets monetary policy; meets 8 times per year
The FOMC consists of the 7 Board Governors plus 5 of the 12 Regional Bank Presidents (rotating).
The Fed's Dual Mandate
Congress gave the Federal Reserve two primary objectives, known as the dual mandate :
- Maximum Employment — Keep unemployment as low as possible without triggering inflation
- Price Stability — Keep inflation under control (current target: 2% annually)
These goals can sometimes conflict. Low unemployment can lead to rising wages and inflation, forcing the Fed to make trade-offs between the two objectives.
Tools of Monetary Policy
The Fed uses several tools to implement monetary policy, each with different effects on the economy and markets.
1. Open Market Operations
Open market operations involve the buying and selling of government securities by the Fed:
- Fed Action Effect on Money Supply Effect on Interest Rates Economic Impact
- Buys securities Increases (injects money) Decreases Expansionary/stimulative
- Sells securities Decreases (removes money) Increases Contractionary/restrictive
How it works : When the Fed buys Treasury securities from banks, it credits their reserve accounts with new money. Banks then have more money to lend, increasing the money supply and pushing down interest rates.
2. Federal Funds Rate
The federal funds rate is the interest rate banks charge each other for overnight loans of reserve balances. The FOMC sets a target range (e.g., 5.25%-5.50%). Changing this target range is the Fed's primary way of conducting monetary policy; it keeps short-term market rates close to the range mainly with interest on reserve balances and the overnight reverse repurchase facility rate.
Fed Action Impact Example
Lowers target rate Stimulates borrowing and spending December 2008: Near zero (0%-0.25%) during financial crisis
Raises target rate Slows borrowing and spending 2022-2023: Raised to fight inflation
The federal funds rate influences many other rates in the economy, including the prime rate (typically fed funds + 3%), which in turn affects mortgages, credit cards, and business loans.
3. Discount Rate
The discount rate is the interest rate the Fed charges banks for direct loans from the discount window. It's typically higher than the federal funds rate and serves as a "lender of last resort."
4. Reserve Requirements
Reserve requirements determine what percentage of deposits banks must hold in reserve (not lend out):
- Fed Action Effect
- Lower requirements Banks can lend more → expansionary
- Higher requirements Banks must hold more → contractionary
Note : The Fed reduced reserve requirement ratios to zero effective March 26, 2020, and had not reinstated them when checked in October 2026. Lowering reserve requirements is therefore not an available stimulus tool today.
5. Regulation T (Margin Requirements)
Though less commonly discussed, the Fed also sets Regulation T , which governs how much investors can borrow to purchase securities (currently 50% initial margin). Lowering Reg T requirements is expansionary; raising them is contractionary.
Expansionary vs. Contractionary Policy
Understanding when and why the Fed uses each type of policy is crucial for investment advisers.
- Aspect Expansionary Policy Contractionary Policy
- Also Called Loose, easy money, accommodative Tight money, restrictive
- When Used Recession, weak economy, low inflation Overheating economy, high inflation
- Fed Funds Rate Lowered Raised
- Open Market Operations Buy securities Sell securities
- Money Supply Increases Decreases
- Effect on Borrowing Cheaper, more available More expensive, less available
- Quantitative Easing (QE)
When conventional tools aren't enough (rates already near zero), the Fed may use quantitative easing :
- Fed creates new money electronically
- Uses it to buy large quantities of Treasury bonds and mortgage-backed securities
- Injects massive liquidity into the financial system
- Pushes down long-term interest rates
The Fed used QE extensively after the 2008 financial crisis and during the COVID-19 pandemic, growing its balance sheet from under $1 trillion to over $8 trillion.
Impact on Investments
Monetary policy affects virtually every asset class:
Bonds
- Fed Action Bond Price Effect Why
- Raises rates Prices fall New bonds offer higher yields; existing bonds less attractive
- Lowers rates Prices rise Existing bonds with higher coupons become more valuable
- Stocks
- Fed Action General Stock Effect Why
- Raises rates Often negative Higher borrowing costs, lower valuations, bonds more competitive
- Lowers rates Often positive Cheaper borrowing, higher valuations, stocks more attractive vs. bonds
- Different Sectors React Differently
- Sector Higher Rates Lower Rates
- Financials May benefit (wider lending margins) May struggle (compressed margins)
- Utilities Hurt (high debt, compete with bonds) Benefit (low rates, dividend appeal)
- Real Estate Hurt (higher mortgage costs) Benefit (lower financing costs)
- Technology Hurt (future earnings discounted more) Benefit (growth valued more highly)
- In Practice: How Investment Advisers Apply This
When the Fed is raising rates :
- Review client bond portfolios for duration risk
- Consider shorter-duration bonds to reduce interest rate sensitivity
- Evaluate rate-sensitive sectors (utilities, REITs) for potential underweights
- Discuss with clients that rate increases often precede economic slowdowns
When the Fed is lowering rates :
- Look for opportunities in rate-sensitive sectors
- Consider extending bond duration to capture price appreciation
- Recognize that rate cuts often signal economic concerns
- Help clients understand that "good news" for bonds may signal "bad news" for the economy
- On the Exam
The Series 65 exam frequently tests:
The Fed's dual mandate (maximum employment and price stability)
Tools of monetary policy (federal funds rate target, open market operations, discount rate, reserve requirements)
- Expansionary vs. contractionary actions and when each is appropriate
- Impact on securities (inverse relationship between rates and bond prices)
- FOMC as the policymaking body
- A common question format is: "If the Fed wants to stimulate the economy, it would..."
- Key Takeaways
- Monetary policy is controlled by the Federal Reserve, not Congress
- The Fed has a dual mandate : maximum employment and price stability (2% inflation target)
Changing the federal funds rate target is the Fed's primary policy lever; open market operations (buying/selling securities) are another tool
- Buying securities = expansionary; selling securities = contractionary
- Fed funds rate is the benchmark for short-term rates
- Bond prices move inversely to interest rates
- Stock valuations are generally negatively affected by rising rates
- The Fed operates independently from political pressure