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Should Investors Act on Chattier Fed?

Federal Reserve officials aim to be much clearer about their expectations for interest rates starting this month, but advisers warn against reading too much into this newfound transparency.

Fed officials said they will begin releasing quarterly forecasts for interest rates after their next meeting on Jan. 24-25 in an attempt to make policy decisions more effective. Officials will say where they expect rates to be in the last quarter of 2012 and at the end of the next few years. They will also describe what is driving those expectations, including their projections for economic growth, unemployment and inflation. While the new information might offer some clarity, advisers warn against making big bets based on those projections. “By no means should anybody rely on that as the end all,” says Nicholas LaVerghetta, a financial adviser in Ramsey, N.J.

Investors shouldn’t react too much to the Fed’s expectations because other factors like an increase in inflation could cause those projections to change suddenly, says LaVerghetta. “There could be people taking more risk than they realize,” he says.

And while some might use the Fed’s expectations for interest rates to guide their own projections on how certain asset classes should perform, the additional information might actually increase market volatility by giving investors another report to react to, says Denise Shull, founder of The ReThink Group, which consults traders and advisers on the psychology behind investing. “It could be more fodder for speculation,” she says.

Advisers also warn that factors outside of the Fed’s control may have more influence on market performance. For instance, Treasury investors could lose money even if the Fed expects rates to stay low for a certain period of time, says Jeff Sica, president and chief investment officer at Sica Wealth Management in Morristown, N.J. While there would be less risk of rates shooting up and pushing prices down, Treasury bond prices could still sink if investors look elsewhere for yield, he warns. “The Fed doesn’t control treasury prices,” he says.

LaVerghetta says investors should go with a more balanced approach. With short-term rates expected to stay low until mid-2013, LaVerghetta is holding riskier high-yield bonds which offer more appealing yields than safer Treasury bonds and should juice returns if rates stay low. But he is also holding mostly short-term bonds so that he can be ready to re-invest at higher interest rates if rates rise unexpectedly.


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