Reconciling Fed Policy with your Financial Life


This past week, the Federal Reserve Board announced they were not cutting back on their efforts to stimulate the economy.  This surprised many investors, who had been expecting the Fed to begin tapering their bond buying program.  The question many have is, how does this affect my own financial decisions?  I had a chance to answer some of these questions on the September 20th Edition on Focus 580 with host Jim Meadows and guest Kevin Waspi.

Summarizing some of this program:

How Should I React to this News?

Both Kevin and I agreed on the answer to this question: for most people this is just market noise that can be ignored.  It is important to recognize the difference between an Investor, who is seeking gains by investing long term in companies and participating in the growth and income of those investments, and a Speculator, who attempts to profit by making bets on short term market movements.  For most individuals, it is more important to focus on meeting long term goals through sticking to their investment plan.  Speculating requires a lot more risk, knowledge and time than the average investor possesses.

What Does this News Mean about the Economy and my Portfolio?

One interpretation could be that the Fed is not optimistic about the recovery of the economy, which could be worrisome to investors.   However, the Fed's decision is based on many factors including unemployment and inflation.  They are in a delicate balancing act among many different factors.

Kevin pointed out that as the Fed does taper off their stimulus in the coming months or years, savers may benefit.  It could be expected that interest rates would rise over the long term, resulting in higher yields on checking, savings and even bonds.  In the short term, we should expect some volatility as investors try to gauge how market changes will affect future profits.

Check out the complete episode here.  We also addressed many other questions including:

  •  How to decide between investing and saving an emergency fund
  • What Fed policy may mean for future inflation
  • How would changing interest rates affect the Fed Balance Sheet