Here's Exactly What Investors Should Look for From the Federal Reserve's October Meeting
It’s almost here. On Wednesday afternoon, the Federal Reserve will announce its decision on the federal funds rate, which serves as the basis for other interest rates, such as loan rates and bond yields. That’s why so many people are already anxiously anticipating the update.
The thing is, we’ve already got an idea of what to expect.
The market’s already made an educated guess
The Federal Reserve’s governors regularly update their expectations for how the federal funds rate will change over time — represented by the so-called “dot plot” — based on their projections of future inflation and economic health. This is a relatively imprecise outlook, though, with yearly projections. The market and the economy move much more quickly, reflecting changes made every quarter, if not every month.
Fortunately, there’s a timely (and surprisingly accurate) public prediction of changes the federal funds rate may be about to undergo. The FedWatch tool, regularly updated by stock exchange operator CME, indicates the collective directional bets that traders are making on interest rates via fed funds futures. And as it stands, this crowd says there’s a 90% chance the Federal Reserve will maintain the federal funds rate target range at 3.75% to 4%.
Effective Federal Funds Rate data by YCharts
That won’t be everything the Federal Reserve releases with Wednesday’s 2 p.m. ET announcement, of course. The committee will also issue a general statement explaining how it reached its decision and what it predicts for the foreseeable future.
Although we won’t know what’s on the Fed’s governors’ minds until the time comes, investors have a reasonably good idea of what they’re likely to hear. In September, the Federal Reserve announced it would raise the federal funds rate by a quarter point. That statement said: “While uncertainty remains elevated … [p]roductivity growth is strong, and capital investment is robust. Job gains have kept pace with the workforce, and the unemployment rate has changed little.” The statement also pointed out, “Inflation remains elevated.”
Not much has changed in the meantime. So look for similar language this time around.
Image source: Getty Images.
In this vein, we’ll be getting an important look at the current inflation picture on Thursday, with September’s consumer spending and personal income report from the Bureau of Economic Analysis. Although the Fed’s governors won’t have this data in hand by the time they make Wednesday’s decision, know that the Federal Reserve’s governors, as well as the market itself (according to the CME’s FedWatch), are counting on a quarter-point increase of the federal funds rate’s target range in December. Clearly, the committee sees enough lingering inflation ahead to act sooner rather than later.
It shouldn’t be a serious concern
While interest rate decisions inspire headlines and prompt plenty of speculation — not to mention volatility — none of it really matters to true long-term investors. Your job as a buy-and-hold investor is simply finding quality stocks that aren’t really impacted by interest rates.
That doesn’t mean a rate hike won’t impact high-quality names. They tend to be short-lived impacts, though. If you’re worried some of your positions are potentially vulnerable to Wednesday afternoon’s news, it may be time to take a more scrutinizing look at that company’s place in your portfolio.