By Jonnelle Marte
The Federal Reserve aims for greater transparency with the new interest-rate forecasts the agency released today — but without knowing what to look for amid all the new information, advisers say investors may end up more confused than ever.
If anything, the charts showing when and how much Fed officials expect interest rates to increase may serve only to add uncertainty, investing pros say. First, it helps to understand what the forecast contains: One chart shows which year officials expect to increase short-term interest rates, breaking out how many officials expect rates to increase this year, next year and so on. A second chart shows where interest officials expect short term rates to be at the end of 2012, 2013, 2014 and in the long run.
But investing pros say people should be careful about how they digest the data — adding that not all of the forecasts should be treated equally. “There might be a little confusion in how to interpret it,” says Anthony Valeri, fixed income strategist for LPL Financial.
Some advisers say investors should pay particular attention to the Fed’s near term expectations. In the graph showing where Fed officials expect rates to be at the end of each year, investors should put more weight on the projections for 2012 through 2014 than they do on the projection for the “longer run,” says Valeri. The longer term figure, which called for 4% interest rates in the forecast released today, is more likely to change before it comes to fruition, with factors like inflation, unemployment and economic expectations likely to move the number any which way, says Jeff Bernier, president and chief investment officer of TandemGrowth Financial Advisors in Alpharetta, Ga. In the short run, Fed officials expect rates to remain close to zero through 2014, according to the projections. That is in line with what many investors have expected, says Valeri, which means any impact to Treasury yields should be mild.
Investors should also pay attention to the graph showing when Fed officials expect to increase interest rates for a hint of how confident they are in the economy, says Mitchell Reiner, chief operating officer for Capital Investment Advisors in Atlanta.”If the majority say we should raise rates within two years that’s a good sign,” says Reiner. The projections released today showed officials are divided: 11 officials expect the first rate increase to happen between 2014 and 2016 and six said it would happen in 2012 or 2013. The disparity could be a signal of uncertainty and weak confidence in the economy, says Reiner.
To be sure, advisers warn against making bets based off of the Fed’s projections. The forecasts might not impact markets as expected, warns Bernier. For example, if inflation increases suddenly, officials would be pushed to consider raising interest rates earlier, says Bernier. Likewise, further deterioration of the European economy could drag down the U.S. and delay any planned interest rate changes, says Valeri. “It’s a forecast like any other,” says Valeri. “It probably shouldn’t be read into too much.”
Still, advisers say the Fed’s forecasts can offer a meaningful picture of how their investments might be impacted. Generally, a sense that the Fed might raise rates sooner than expected could lead bonds to sell off and bond yields to rise, says Bernier. On the flipside, if it looks like the Fed will keep rates low for longer than expected, some investors may feel more comfortable holding bonds. “It would give us signals about whether or not we should adjust,” says Reiner.