How Will The Fed Decision Affect Your Portfolio?

No matter where you look in the financial press, you see predictions about what the Federal Open Market Committee (FOMC) will do with interest rates after its next meeting. 

This is nothing new, of course. It’s been happening every few months for years. And it has certainly picked up steam with many inside the Federal Reserve openly discussing the likelihood of a hike. 

But journalists aren’t allowed to attend FOMC meetings, and can only report the results when the committee issues a press release.  So whenever an event like this comes up investment “journalists” and speculators are forced to create the story themselves. 

The New York Times — amongst many other widely-read outlets — has now made the claim that Friday’s jobs report “all but guarantee[s] that policy makers at the Federal Reserve will raise interest rates” this month.

But why is that? What is a jobs report, exactly? 

Can One Report Change Everything?
Also known as the Employment Situation Report, the jobs report is released monthly by the Bureau of Labor Statistics  that shows how many jobs (non-farm payrolls) have been added in the United States during the previous month. It also gives information about the current unemployment rate, average hourly earnings, and the average workweek.

On Friday, the most recent report announced that 211,000 people were hired for new jobs in November. That’s 21,000 more than Wall Street analysts had been expecting.

Obviously, that’s good news. More people than expected were hired during a single month. But a huge question remains: just how relevant are those 21,000 jobs in deciding how much interest lenders should charge for loans?

We can’t truly know. Even the people behind those closed doors at the Fed can’t possibly know exactly what that one report’s effect will be on the strength of the U.S. economy and foreign exchange rates going forward. 

But just by looking closely at this possibility — that a single jobs report that boils down to a negligible uptick in new corporate hiring could sway monetary policy — it’s clear just how controversial the rate hike will be. 

Even if these reporters are right, and this is the final straw for the Fed to make its move, it also means that the pace of rate hikes cannot be swift. 

If the difference of 21,000 jobs means so much to monetary policy, it’s clear to me that Fed officials are simply not overly confident in any decision they end up making. 

Interest Rates Will Move Slowly
Therefore, if rates are raised at next week’s FOMC meeting, it will only be a tiny step in a very long road. Each and every piece of economic or corporate news will continue to be in play for future decisions. 

Rates may go up a quarter of a percent this month. But can you really imagine they’ll end anywhere near their pre-2009 levels this time next year? 

The point is that the speed at which the Fed will raise rates, whenever that may be, has to be slow… especially if such a relatively small “jobs beat” can be a deciding factor for all of the United States’ monetary policy. 

What To Expect After A Rate Hike
So what does that mean? It means low rates are here to stay. Even if we suddenly enter into a rising interest rate environment, it will likely be one of the slowest rate climbs in history. 

And considering we are starting at zero-bound rates, income will remain hard to come by. 

Bonds will still be too expensive and pay too little. And savings accounts will continue to be worthless for retirees living off the interest in their nest eggs.

In other words, the fears that stocks will crash after a rate hike are unfounded. After all, that’s the only investment income left in play with rates remaining so low.

That doesn’t mean equities won’t be volatile following a rate-hike decision. They will be. Investors are panicky by nature. 

But if you can think about all of this — a further extended period of low rates across the board and the slightest piece of economic news raising doubts in Fed officials’ minds — it’s clear that stocks will continue to be in demand… especially steady dividend-paying ones.

The best course of action, therefore, is to think long term and about the big picture. End-of-the-world headlines about scary rate increases are just noise. 

Stick to your guns throughout next week’s FOMC meeting, no matter what the outcome. 

Action To Take: If you have a portfolio of well-performing income equities, you’ll be thankful that you did this time next year.

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