The Fed and interest rates: What investors should know

What's the Federal Reserve's next move?

There has been much chatter in the last few months since the Federal Reserve’s decision to raise interest rates in December. Economists and investors are keeping a watchful eye on the markets as the Fed decides its next move.

In December 2015, the Federal Reserve raised interest rates for the first time since 2007. At the time, the Fed announced that they hoped to raise rates three to four times by the end of 2016. But they indicated that they would only do so if economic data showed evidence of a tightening labor market accompanied by rising inflation.

However, market volatility increased in January and February over renewed concerns of global economic weakness. Tumbling U.S. crude oil prices threatened to keep inflation below the Federal Reserve’s objective of two percent; meanwhile, China moved to devalue its currency, causing a spike in volatility in global currency markets. These fears contributed to the turbulent market activity.

In its March meeting, the Fed took these concerns into consideration and did not increase rates. Fed Chair Janet Yellen announced that interest rates would remain the same in April and reiterated that the committee would be watching economic data closely before approving another rate hike

While market conditions have since stabilized, the April jobs report was one sign that the economy has more room for improvement before the Fed considers another rate hike. We believe the Fed will ultimately move slower and in a more gradual manner – likely reducing the amount of rate increases to just one in December 2016.

Remember to take a balanced approach to investing. A long term view and diversification will help you overcome the “noise” of the markets and keep you focused on your long term objectives. Mentally prepare yourself to take advantage of volatility by rebalancing your portfolio when opportunities present themselves.

Categories: Finance