The Fed Just Got 1 Big Reason to Raise Rates. This Week Could Deliver Another.
Key Points
The market is already pricing in more than a 50% chance of a rate hike at next week's Fed meeting.
The August inflation report will be the last major piece of economic data prior to the meeting.
A hotter-than-expected reading could push the Fed to raise rates.
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Last week, the Federal Reserve got one big reason to consider an interest rate hike at its September meeting. This week could give it one more.
The August non-farm payroll report showed that the U.S. economy added 162,000 jobs. This was sharply higher than the upwardly revised 21,000-job gain in July and nearly triple its forecast number.
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The labor market has been mixed for most of the past year. But the August report could change its characterization from "stagnant" to "resilient."
This report has increased the odds of a rate hike at September's meeting next week to more than 50%. And if Friday's inflation report also comes in hotter than expected, it could make an increase that much more likely.
Should investors make any changes to their portfolio before then?
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This week's inflation report could change everything
The Consumer Price Index (CPI) report will deliver the last major piece of economic data before the Sept. 16 rate decision.
This will be an important one, too, because the market is split on what the Fed will do. As of Sept. 8, the federal funds futures market gives a 58% chance of a rate hike next week. That means the August CPI report could swing the decision in either direction.
If it comes in hot, that's probably not good news for stocks. Higher interest rates can increase borrowing costs for both businesses and consumers. Companies that tend to carry higher debt loads, such as utilities and small caps, could be especially impacted. Plus, higher interest rates could make bonds and other fixed-income investments look comparatively more attractive.
But there should be a distinction between something that can cause short-term volatility and something that justifies a change in your long-term investment strategy.
Here's what I'd do before the Fed's September meeting
Nothing. If you have a long-term time horizon of several years or even decades, there's no reason to let a Fed meeting alter your plans.
Selling a fund like the Vanguard S&P 500 ETF (NYSEMKT: VOO) would require being correct about several things:
- The August inflation reading
- The Fed's response to it
- The market's response to it
- The time to buy back in
Get any one of those incorrect, and you could find yourself coming out behind compared to maintaining a buy-and-hold strategy.
That's why I'd treat a potential September rate hike as a catalyst for higher volatility but not nearly significant enough to warrant a strategy change.
Investors with a long-term view shouldn't be investing for the next Fed meeting. They should be investing for a time far into the future. If it were me, I'd be holding on to the Vanguard S&P 500 ETF here and continuing with regular monthly investments.
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David Dierking has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
