The Fed Voted. Now What?

The Federal Reserve voted this week to keep its main interest rate unchanged. Nine members supported the decision. Three wanted rates raised because they remain concerned about rising prices.

That was an unusually divided vote, especially early in the term of Fed Chair Kevin Warsh. Within minutes, banks, economists and market experts began explaining what it meant.

Some predicted a rate increase in September. Others said the Fed may remain on hold. Stock, bond and currency markets each reacted differently. One J.P. Morgan economist said the chairman's remarks were difficult to turn into a clear view of the economy.

Does It Matter?

Interest rates matter, of course. They affect some but not all financial planning considerations ─ the variables or risks that make a plan work or fall short. We stay laser focused on six.

Investment-bank analysts study important information: company profits, hiring, wages, consumer spending, borrowing costs, inflation, stock prices and the amount investors are willing to pay for future profits. This research can reveal genuine risks. Policy and legislative risks, such as Fed interest rate decisions and tax law changes, are part of all of them.

The news business rewards loud and dramatic claims. “Stocks May Drop 30%” attracts more attention than “Your portfolio should support the income you need and want, with a margin of safety to withstand loss and unplanned expenses.”

Well-informed experts can review the same facts and reach different answers. The current Fed probably reflects our political divide too. This does not mean market forecasts are worthless. Leaning on history, high stock prices suggest lower future returns; high borrowing costs can pressure businesses and families.

A practical message can be found in the Fed’s most recent action: not to make a material portfolio change based solely on the September-rate forecast. The more useful questions are whether a household can manage higher-for-longer borrowing costs, whether bond holdings have too much interest-rate risk, whether cash needs are covered, and whether stock-return assumptions remain realistic.

Stress-testing a plan will show the effect of interest rate changes and many other foundation assumptions. Remember 18 percent fixed mortgage rates in 1981? We are not likely to see those again, but planning software has come a long way to help us manage more realistic rate increases when they come.