DALLAS — Wednesday, the Federal Open Market Committee announced its long-expected decision to make an incremental increase in the target Fed Funds rate by 0.25 percent, bringing it to a range between 0.25 and 0.50 percent. The Fed, citing improvements in the economy since 2008, indicates it will make future rate increases gradually. Today’s decision will have an impact on individuals with variable interest rate debt as well as short-term and institutional investors, but means little for long-term investors, such as those investing for retirement.
Federal Reserve governors were unanimous in this decision to increase the Fed Funds rate. Prior to today’s announcement, the rate had sat in a range between zero and 0.25 since 2008 and has not been raised since 2006.
GuideStone Capital Management, LLC Global Investment Strategist David S. Spika said the question at this point is how rapidly rates will rise.
“The Fed’s preferred measure of inflation remains below the desired level of 2 percent, so the pace of hikes will be subject to an increase in this measure,” Spika said. “We believe this is good news for investors in that it removes the likelihood of rapid and aggressive rate hikes that could derail the current economic expansion and create additional volatility for the financial markets.”
While analysts will comb through the Federal Reserve’s comments, along with the news conference offered by Fed Chair Janet Yellen on Wednesday (December 16), long-term investors should continue to focus on their objectives and not on headlines that may trigger short-term market fluctuations.
“Retirement investors should consider their time horizon and their investment objectives,” said GuideStone Financial Resources President O.S. Hawkins. “There are many experts out there with opinions on steps for institutional and short-term investors. As we remind our participants anytime there is significant news, the performance of your retirement account moving forward will be determined based on results of the financial markets in the future, not the past.”
Spika noted that rising interest rates are normal at this point during an economic cycle.
“The economy has been in expansion since mid-2009 and no longer requires emergency monetary policy to support it,” Spika said. “We believe that the onset of a gradual and cautious rate hike cycle is good news for investors and do not expect the Fed Funds rate to reach more than 2.0 percent to 3.0 percent in this cycle, a level that could take up to three years to attain.”