The decisions made at the next Federal Open Market Committee (FOMC) meeting on Sept. 20-21 could affect market performance for years to come.
That's why investors should prepare ahead of time.
Of course, there's no way to predict exactly what U.S. Federal Reserve Chairman Ben S. Bernanke will do, but 20 years of experience in global markets suggest he's considering five alternatives drawn from a rapidly diminishing menu of options:
- Eliminate interest paid on reserves.
- Sell short-term securities while buying longer-term debt.
- Target actual inflation.
- Buy more assets outright in a program that would be somewhat like the $600 billion worth of Treasuries it bought as part of QE2.
- And, finally, it could just do nothing.
That being said, I have a pretty good idea which one of these options Bernanke will choose. But more importantly, I can tell you three moves you can make now to safeguard your investments ahead of time.
Let's look at the Fed's options first.
First, the Fed could eliminate interest paid on reserves. Banks would hate this, but it would go a long way towards encouraging lending.
Banks right now are borrowing at extremely low rates, building up huge cash stockpiles and investing the spread. By doing this, the banks are earning more than they would from even their best customers at a fraction of the risk.
Customers have become almost irrelevant as a result, which is something our leaders cannot seem to grasp. So while they're ostensibly all about helping Main Street, they're really just selling out to Wall Street.
to get the money to the consumer where it can be used to create wealth.
The second solution is to sell short-term securities while buying longer-term debt
. You may recall that the Fed did this in 1961 as part of something they called "Operation Twist."
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