The Fed and the Markets: What It Might Mean for You

How the Fed Can Impact Your Portfolio

There’s a pretty good reason why the world pays close attention to the statements and actions of the Federal Reserve. As the governing board responsible for setting monetary policy for the largest economy in the world, the Fed’s power cannot be overstated.

But really, how much does that matter to you as an individual investor? Does the reach of the Fed go as far down as your portfolio?

The short answer is a definite probably. “Probably” because few things the Fed does will directly affect the stocks and bonds in your portfolio. However, there could be tremendous indirect impact – although it’s not always obvious and it doesn’t always happen quickly.

Let’s review how the Fed’s actions could affect markets enough that you might see some kind of impact on your investments.

Interest Rates

The Fed grabs the most attention when it makes a decision on raising or lowering its Fed funds rate. By itself, the rate is relatively meaningless to your portfolio. For starters, the Fed funds rate applies to interest that banks or similar institutions charge other banks for unsecured short-term loans (typically overnight) to help meet Federal Reserve requirements.

So unless you own a bank, you won’t see a direct impact. However, a change in the Fed funds rate could influence shifts in other interest rates such as car loans, mortgages and other consumer variable rate loans. A Fed funds rate change also could affect the borrowing rates for companies as well, which could ultimately affect their profitability and their stock prices. Bond interest rates could increase, which could lead to a decrease in bond prices. However, if you hold a bond to maturity you won’t be affected by bond price movements.

But to be clear, there are a lot of degrees of separation from Fed funds rate activity to your portfolio.

Economic Stimulus

The Federal Reserve has a lot of one thing – money. And sometimes it uses that money to help stimulate the economy, typically by purchasing short- or long-term Treasurys. Those activities have a clear impact in the bond markets, and sometimes the broader economy.

Research and Data

The Fed consists of 12 Federal Reserve Banks, each staffed with researchers and economists who churn out reports that range from extremely influential to barely noticed. In addition, the Federal Open Market Committee (FOMC) publishes a report, commonly called the “Beige Book” that summarizes current economic conditions.

The market can react strongly to uncertainty, and these reports can sometimes provide insights that are uncomfortable or unexpected by the markets.

Fed Announcements and Testimony

The chairman of the Federal Reserve periodically testifies before Congress on the Fed’s economic outlook and actions taken. Fed watchers tend to listen carefully to the testimony for clues about any changes in Fed policy or outlook. Even a hint of a change can send the markets soaring or tumbling.

In addition, the 12 members of the FOMC routinely give speeches and public statements – all of which are scrutinized by Fed watchers and market professionals for any hint of what the Fed might do next.

Your Investing Bottom Line

So what does all of that add up to? Honestly, it’s complicated. In the end, regardless of what the Fed says or does, the market reaction is difficult to predict.

“There’s no question that the Fed can have a tremendous influence on the markets, but the market moves for all sorts of reasons,” said Joe Correnti, senior vice president of brokerage product at Scottrade. “That’s why long-term investors need to keep their eyes on their investing plan. Your plan is your guide, regardless of why the market might move.”

Read Next: Check out the impact of the Fed on interest rates.

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