If there was ever any doubt that we would end the year without a big interest rate hike, it's probably been erased by now. Still, investors should keep an eye on the Federal Reserve because their actions—or inactions—can tell us something about how well they think the economy is humming along and provide some clues as to what you should be doing with your money.
For now, because of Brexit and other global-market concerns, I'd say the folks at the Fed are in no particular hurry to raise the nation's unusually low interest rates too fast. The more likely short-term scenario is there could be one small increase sometime between now and the end of the year to ever so gingerly lift the rate.
Why the hesitation on the Fed's part?
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
For one thing, the market does not seem to be expecting anything more than an incremental increase, as I'm sure the Fed knows. Anything beyond that would catch the market by surprise, and as we saw with Brexit and many other unexpected moments in the economy, the market does not like surprises.
It's also worth remembering that one of the Fed's main responsibilities is to pursue full employment. Right now, employment looks pretty good overall, with the unemployment rate hovering around 5% (after ratcheting up to 10% at the height of the recession).
So there's just not much incentive on the Fed's part to do anything that risks spooking the market. I think what's more likely to happen is the Fed will gradually raise interest rates—not over a period of months, but over a period of years—closer to the historical norm of about 6.5%. When the Fed does that, it is signaling that it sees a healthy, improving economy that can handle the rate increase—as long as the rate increase doesn't come sweeping in too quickly.
This steady-as-she-goes increase is a big call to action for investors because it should create some buying opportunities in the market.
Where would those be? A few examples of the potential upside: The financial sector would be one place to look because they tend to benefit from a growing economy. The housing market and companies that rely on discretionary consumer spending also could do well because, as wages improve, people can look beyond life's necessities and afford bigger homes, nicer cars or vacations that take them farther than an hour's drive from home.
Of course, even in the best of times, not everything is a good bet. As interest rates rise, bonds will suffer as their prices fall. Those who have invested in longer-term assets could experience a loss. Such investors generally are trying to hold onto their principal while chasing yield, but they may find they were carrying more risk than some people in the market.
Finally, investors should always be ready for any market volatility because that can create good buying opportunities for those who are prepared and remain calm. As so often is the case, patience will win the game.
Chris Abts, president and founder of Cornerstone Retirement Group Inc. in Reno, Nevada, is an Investment Adviser Representative, licensed insurance agent, and has passed the Series 65 exam.
Ronnie Blair contributed to this article.
-
Plan for Higher Health Care Costs in 2026: Projected Medicare Part B and Part D PremiumsIn 2026, Medicare participants will pay more for their health care. Part B costs are expected to rise more than 10%. Here's what you can do.
-
I Planned to Travel in Retirement, but the Weak Dollar is Making a European Vacation Harder to Afford. What Can I Do?Travel pros explain how you can afford a European vacation in retirement, despite a weak dollar.
-
Avoid Medicare's 'Shadow Tax' With This Financial Expert's IRMAA-Busting TipsYou're cruising along in retirement, and then bam: Your Medicare premiums soar because your income crossed the limit. Take a breath. There could be a solution.
-
Grilling Season and ETFs: There's More Than One Way to Cook Up a PortfolioExchange-traded funds come in a multitude of 'flavors' these days, from passive to active to factor-based. Their flexibility is what makes them so delicious.
-
You Don't Want It, But You Should Plan for It Anyway: An Expert Guide to Long-Term CarePlanning for long-term care is crucial to protect your independence, family and financial stability against unexpected health events and rising care costs not covered by standard insurance.
-
Five Questions to Help Ensure a Happy, Secure RetirementYou need to drill down to what you really want out of retirement. Then you can get down to the business of crafting a financial plan to make it happen.
-
I'm a Financial Adviser: This Is How You Can Save for Big Goals Even if You Feel Like You're Barely Getting ByLearning good financial habits — building an emergency fund, paying down debt, saving consistently — gives you flexibility, options and a path to security.
-
How to Buy an Annuity Online (Without Regret)You should never be rushed into buying an annuity. But now that they can be sold quickly and easily online, you need to be more alert than ever to pushy salesmanship. Here are four signs you're working online with a professional.
-
How Much Income Will an Indexed Annuity Get You? An Annuities Expert Lays Out the NumbersGuaranteed lifetime income sounds great, but how much will it be? Several factors determine your future payout on indexed annuities with an income rider.
-
Financial Fact vs Fiction: Why Inflation Is Lower, But Prices Are NotDo you think bonds protect you from stock losses? Are you confident your assets will go to your intended heirs if all you have is a will? Think again — and read on for other myths that could be leading you astray.
