FOMC Meeting: What You Need to Know for December 2017
The Federal Reserve is expected to hike interest rates during its December FOMC meeting. But the end of Fed Chair Janet Yellen’s tenure could delay any changes to interest rates until her replacement takes over.
On Nov. 2, President Donald Trump announced he would not nominate Janet Yellen to serve another term as Fed chair when her term ends in February. Instead, President Trump nominated Jerome Powell, a sitting Fed governor, to replace her.
That shakeup makes the likelihood of a December rate hike less certain.
Before Powell was nominated, the Fed “dot plot” – an anonymous projection from FOMC members of when the Fed will raise rates – showed most committee members expected a rate hike on Dec. 13.
But even though Fed watchers aren’t as confident in a December rate hike as they were, it’s still more likely than not…
Will the Fed Raise Rates at the December FOMC Meeting?
The CME FedWatch Tool currently projects an 85% probability of a rate hike during the December FOMC meeting. This probability is down from 96.7% – a near certainty – just over a month ago, on Nov. 3.
Even though investors aren’t quite as certain that the Fed will raise interest rates in December, an 85% probability still means a hike is likely.
But replacing Yellen isn’t the only reason some investors have gotten bearish on a rate hike.
Urgent: An $80 billion cover-up? Feds use obscure loophole to threaten retirees… Read More…
The inflation rate is falling short of the Fed’s 2% benchmark, which has some FOMC members skeptical of more rate hikes.
The consumer price index (excluding food and energy), the Fed’s preferred inflation measure, only hit 1.4% in October.
Philadelphia Fed President Patrick Harker said the low inflation metric “continues to elicit caution.” He’s described his vote in favor of higher rates at the December meeting as only “lightly penciled in” during a speech in Tokyo on Nov. 13.
But the Fed might not have a choice but to keep raising rates despite lower-than-expected inflation.
If the Fed doesn’t boost rates, it will have limited ability to combat another economic downturn. With rates currently hovering just above 1%, the Fed can’t expect a rate cut to boost economic growth.
Harker is still leaning toward raising rates because “this is about keeping our powder dry.” In other words, even if the inflation rate doesn’t rise to 2%, the Fed still needs to have tools to spur the economy.
But interest rates aren’t the only tool in the Fed’s stimulus arsenal. It also needs to unwind its $4.5 trillion balance sheet…
Why Unwinding the Fed Balance Sheet Matters to You
The Fed spent trillions of dollars to help stimulate the economy between 2008 and 2015, and some analysts worry pulling the money back out will slow the economy.
Starting in 2008, the Fed began buying up assets in an effort to combat the 2008 recession by injecting money into the economy. The Fed would spend over $3.5 trillion between 2008 and 2015, buying everything from toxic mortgage-backed securities to Treasury notes.
Money Morning Chief Investment Strategist Keith Fitz-Gerald has found that a staggering 93% of all market moves between 2008 and 2016 can be attributed to the Fed.
Since the Fed bought these assets to stimulate the economy, it needs to sell them back, or let them expire, now that the economy is growing again. If it doesn’t, the Fed won’t be able to respond to future downturns the same way.
Even though the Fed needs to get rid of these assets, unwinding the balance sheet means pulling money out of the economy. Analysts are concerned the Fed’s spending spree helped boost stock prices during the bull market beginning in 2009, and without that money, the market could pullback.
This is the “biggest risk” to the economy right now, according to Michael Vogelzang, president of Boston Advisors.
But investors who sell their stocks because of the Fed could be making a mistake.
That’s why Keith isn’t worried by the Fed’s balance sheet or rate hikes.
“Millions of investors mistakenly believe that rate hikes spell the death of equities,” Keith said back in June 2016, just after the Fed’s first interest rate hike since slashing rates in 2008.
And Keith was right.
The Dow is up 22% since then, and the Fed raised rates two more times since then, too.
While the Fed unwinding its balance sheet could be more destabilizing than the Fed raising interest rates, Keith isn’t expecting it to hurt the stock market.
"If the Fed sticks to the snail's-pace normalization it's followed so far, then the markets can absorb the garbage dump,” Keith told Fox Business Network’s Neil Cavuto.
Keith says he would only be concerned if the Fed proposed a gimmicky strategy to get rid of its assets, like bundling junk mortgages with AAA bonds.
Either way, investors are better off staying in the stock market for the long haul. Trying to time the market’s dips and surges is nearly impossible, and it’s more likely you’ll miss out on long-term gains that way.
“Bottom line: Stay in to win,” says Keith.
And while the Fed might not divulge much more information about unwinding its balance sheet during the December Fed meeting, we could see more on it in 2018.
Here’s a look at the Fed’s 2018 meeting schedule, including probabilities for interest rates hikes.
The 2018 FOMC Meeting Schedule
The Fed is planning to hold eight FOMC meetings in 2018.
And according to the “dot plot,” the Fed anticipates three more interest rate hikes in 2018, on top of the potential rate hike during the December meeting.
These are the tentative Fed meeting dates:
- Jan. 31
- March 21
- May 2
- June 13
- Aug. 1
- Sept. 26
- Nov. 8
- Dec. 19
And rising interest rates will impact your money…
What Higher Interest Rates Mean for Your Money
Higher interest rates mean borrowing money becomes more expensive, and they can lead to lower stock prices.
Higher interest rates could lead to stock prices dropping, because businesses will see their borrowing costs rise. This might lead them to borrow less money, which could lead to slower growth.
Rising interest rates also make bonds more attractive investments, because they pay higher yields. Rising bond yields could lead to investors moving their money out of the stock market and into bonds. That means share prices could fall as money leaves stocks.
But we don’t recommend following what everyone else does.
Like Keith says, staying in the stock market is the only way to see long-term growth. In fact, history shows us that stocks will always rise.
But there are two other ways higher interest rates can affect your money…
First, higher interest rates strengthen the value of the dollar.
A stronger dollar means your money will go farther internationally. Imports will become cheaper as the dollar strengthens – each dollar will be able to buy more – and traveling abroad will also be cheaper.
Since oil is traded in dollars, a rising dollar will lead to cheaper oil prices, too.
And while the conventional wisdom holds that a rising dollar means precious metals’ prices will fall, we know that’s not true. In fact, we’re expecting climbing interest rates to be a bullish catalyst for gold and silver.
Editor’s Note: Just click here to sign up for Gold Updates to make sure you get our next recommendation as soon as it’s released.
Second, rising interest rates will lead to higher borrowing costs for most Americans and businesses.
Car loans, new mortgages, and credit card debt will come with higher interest rates.
For example, the average car loan interest rate is currently 4%, but before the 2008 financial crisis, car loans came with an average interest rate of 8%.
Similarly, if you have a variable rate mortgage or a balance on a credit card, your monthly payments will go up after the Fed hikes rates again. You can avoid paying more by refinancing to a fixed-rate mortgage before the Fed raises rates or by paying off your credit card balance.
But higher interest rates will also help, too.
Interest-paying savings accounts will pay more after a Fed rate hike. Currently, the average savings account pays a 0.06% yield. But before the Fed slashed rates in 2008, savings accounts paying over 5% yields were still available.
How to Invest as Interest Rates Rise
Since higher interest rates will affect all parts of the economy and could even lead to a downturn in the stock market, we want our readers to know the two best ways to invest as rates rise.
First, gold is a safe-haven asset that will protect your money over time. And as the Fed’s policies pull liquidity out of the markets, investors could turn to gold.
One way investors can gain exposure to gold is through gold mining stocks.
As gold prices rise, these mining companies instantly become more profitable.
Money Morning Executive Editor Bill Patalon likes Canadian “mining heavyweight” Goldcorp Inc. (NYSE: GG).
Not only will Goldcorp’s gold mines become more profitable when gold prices rise, but Bill says “Goldcorp has consistently been one of the most innovators ‘thinkers’” in gold mining. It’s currently employing state-of-the-art artificial intelligence to analyze its geological data to find the best areas to mine gold.
"I love this strategy," said Bill, "because of its innovativeness, and also because it has both near- and long-term focuses."
Second, owning resilient stocks in well-managed companies is our next way to profit, especially when the market gets volatile.
The trick to making huge profits is to find “must-have” companies that fall into what Keith Fitz-Gerald calls the six “Unstoppable Trends”: medicine, technology, demographics, scarcity & allocation, energy, and war, terrorism and ugliness (also known as defense). The Unstoppable Trends are backed by trillions of dollars that Washington cannot derail, the Fed cannot meddle with, and Wall Street cannot hijack.
And Keith has two Unstoppable Trends stocks that will help you profit even if the Fed makes a decision that hurts the stock market. Just look at how these stocks performed when the dot-com bubble burst in 2000, crashing the stock market…
First, Becton, Dickinson and Co. (NYSE: BDX) is a medical device manufacturer and a leader in the Unstoppable Trend of demographics.
As the population gets older, more people will need medical care, especially long-term care. There’s simply no way of getting around it: People will age, and they will need medical care as they do. That’s what makes this an Unstoppable Trend.
And BDX is the perfect play, because it is a leading manufacturer of one-time-use medical supplies, like syringes and hypodermic needles. Not only do hospitals, physicians, and long-term care facilities constantly need to buy these essential supplies, they’ll need even more of them as the population ages.
Becton Dickinson is also a well-run company. It knows how to turn sales into profits, which means an even bigger boost for shareholders as its sales figures rise.
Becton Dickinson currently maintains an above-industry average profit margin of 10.54%, and the company had enough cash on hand to spend $12.2 billion to buy CareFusion two years ago.
That’s how BDX can maintain its healthy 1.37% dividend yield and growing share price.
BDX trades at $219.07, and Wall Street analysts set one-year price targets for BDX as high as $260, a 19% jump.
Raytheon Co. (NYSE: RTN) is a leader in the Unstoppable Trend of war, terrorism, and ugliness.
Raytheon is one of the five largest defense contractors in the United States, with billions in contracts with the U.S. government and governments across the globe. In fact, international customers make up half of Raytheon’s portfolio. That means Raytheon’s customer portfolio is diversified, and changes in one country’s security are balanced by the rest of the portfolio.
But Raytheon’s services will always be in demand. Governments, and even businesses, always need security and protection. Between a potential conflict with North Korea, China and India’s border dispute, a surge of U.S. troops in Afghanistan, and the growing threat of cyberterrorism, Raytheon is staying busy.
And just look at how global tensions affect RTN stock. When the United States launched Raytheon’s Tomahawk missiles at a Syrian airbase on April 7, Raytheon’s stock jumped more than 2%.
But Raytheon is addressing future threats too. Its cybersecurity and intelligence unit is worth $6.2 billion on its own, especially after its 2016 takeover of Forcepoint, a cybersecurity firm.
RTN currently trades at $183.85 a share and pays a 1.74% dividend yield. Wall Street analysts are giving RTN a one-year price targets as high as $225, which could bring owners a potential 23% gain.
Editor’s Note: “Must-have” companies backed by Unstoppable Trends are a cornerstone of Keith’s wealth-building strategy. But there’s another type of investment he wants Money Morning Members to know about. It's one of his favorites, a kind of "desert island fund" he'd buy if he had to park his money in one place, "retire" from civilization for 20 years, and come back to a pile of money. Click here to learn more…