Investing: The importance of watching the Fed

The Federal Reserve stood pat last week, said Binyamin Appelbaum in The New York Times, and “investors cheered.” The announcement that the central bank would maintain its pace of bond purchases for the time being sparked a market rally, leading to record highs for the Dow Jones and S&P 500 indexes. But the news also surprised some market watchers, who had expected the Fed to start tapering off its bond-buying program. After all, the Fed had spent all summer saying “flattering things about the economy’s performance: how strong it looked, how well it was recovering, how eager they were to step back and watch it walk on its own.”

Investors, wait no longer, said Dan Caplinger in DailyFinance.com. The Fed’s decision “not to throttle back on its low-rate policies gave procrastinators one more chance to reap the financial benefits of low rates.” Americans who are looking for a home should move quickly to take advantage of record low mortgage interest rates, because those rates are likely to rise in anticipation of the inevitable change in the Fed’s direction. If you want to lower your current mortgage payments, “now’s a good time to see if refinancing can still help you, as rates will likely resume their upward trend once the Fed starts easing off the stimulus accelerator.” This is also the moment to take a fresh look at your portfolio, especially if you’re holding bonds. “Avoid getting locked into an unfavorable rate for a long period of time” by trading some of your long-term bonds for short-term alternatives. And don’t panic over your stock holdings. “Investors will get edgy about the possible impacts of Fed policy changes on their portfolios, and that will inevitably cause turbulence in the stock market.” But those ups and downs are normal. Instead of getting scared and selling off, “put yourself in position to profit” by keeping some cash at the ready so you can move on temporary bargains—and be “ready to sell vulnerable positions during short-term bumps higher.”

If you have a managed portfolio, your adviser may be doing all that for you, said Daisy Maxey in The Wall Street Journal. But it pays to ask and be sure. Many advisers have been caught “off guard” by the Fed’s decision and are “recalibrating their advice for clients.” For some, this could mean moving portfolios into bonds or “strategically adding more stocks.” Don’t be surprised if your adviser plans to add more emerging-market stocks to your portfolio or embark on “some tactical buying.”

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