Investors shouldn’t panic over imperfect Fed policy tools
With the Federal Reserve meeting underway, investors shouldn’t panic about the latest announcement and stick to basic investment fundamentals.
During this two-day meeting, it’s widely predicted the U.S. central bank will hike rates by a further 75 basis points.
Once again, we can see the Fed is driving investor sentiment, stock markets and decision-making.
As I was quoted by MSN Money, Financial Mirror StockHead and Financial Express, amongst other media, only last week the markets were in turmoil and are now waiting to see the direction the bank will likely take.
Rather than adopting a hawkish stance, Chair Jerome Powell will likely come out on Wednesday affirming his commitment to reduce inflation.
This means hiking interest rates higher and faster than previously anticipated to cool down the economy and slow down prices. This will translate into elevated costs for businesses and households.
Even though some of this expectation will have already been priced-in by markets, it will likely generate uncertainty – loathed by markets – which could lead to mass investor anxiety.
Naturally, investors should avoid complacency, yet they should also avoid panicking and reacting to markets fuelled by Fed policy tools.
Whatever the Fed announcement may be, it should be considered by investors, but it shouldn’t take precedence over basic investment truisms.
Investors should contemplate allocating cash to risk assets – along with the saying ‘to buy when others are fearful’, whilst remaining sufficiently diversified by asset type, sector and geography.
Investors will be using volatility as an opportunity, as history and recent data has taught us that market turbulence usually leads to major opportunities to amass wealth for investors who top-up their portfolios with quality stocks at lower prices.
The Federal Reserve will have to react to the soaring inflation, which will again drive investor anxiety and perhaps lead to bad investment decision-making.
As such, investors should remain focused on time-honoured fundamentals such as future trends, diversification, cash flow and profitability.