The FOMC meets next week and many predict -- given current economic conditions and given the possible stimulus effect the Tax Cuts and Jobs Act of 2017 Act (should it become the law of the land) might have on the economy -- the Federal Reserve will raise its benchmark interest rate target to between 1.25% and 1.5%.
And here's what one advisor had to say about that.
"My primary thought on the impact of the likely Fed rate hikes is counterintuitive to what most people think and is based on economics," said Bob Pugh, president of Insight Wealth Management. "The Fed controls rates only at the very short end of the yield curve. Many economists argue that the Fed has little or no impact on longer rates. But I differ with that conclusion somewhat."
According to Pugh, when the Fed raises short-term rates, it has a suppressing effect on long-term rates. "Nominal interest rates are comprised of real rates and an inflation expectations component," he said. "So, when the Fed tightens on the short end of the yield curve it reduces expectations for inflation, and thus restrains the inflation expectations component of long-term rates."
Keep in mind, he said, that despite this effect, long-term rates could continue to rise because of other factors, such as strengthening economic growth.
"They just wouldn't rise as much amidst a Fed tightening," said Pugh. "So, if an investor is confident that the Fed will tighten they should hold off investments in short-term fixed-income assets until after the Fed moves, and go forward now with investments in long-term fixed-income assets."
As for equity strategies in light of expected Fed actions, Pugh recommends reading "Invest with the Fed: Maximizing Portfolio Performance" by Robert Johnson, Gerald Jensen and Luis Garcia-Feijoo.
One last note: Resist the urge to refinance your mortgage before the FOMC meets.
Pugh said homeowners with mortgages should resist the sales and marketing pitches to refinance their mortgage before the Fed meets next week. "The pitch we hear from mortgage companies is false," said Pugh. "They push people to refinance or get a mortgage in advance of the Fed's raising rates, claiming Fed actions will increase mortgage rates. It should be the opposite. Fed tightening on the short end of the yield curve makes it less likely 15- and 30-year mortgage rates will rise."
Current mortgage interest rates as of Wednesday on Zillow were: 3.74% for a 30-year fixed; 3.16% for a 15-year fixed; and 3.27% for a 5/1 ARM.
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