Why Investors Can Ignore the Fed's Interest Rate Decision This Week

The Federal Reserve's third Federal Open Market Committee (FOMC) meeting of 2024 is underway. During the meetings, the central bank strategizes its monetary policy, which routinely sends the markets into a frenzy over interest rate speculation.

Expectations for this meeting, which will account for both the April and May FOMC gatherings, are not particularly high thanks in part to lingering inflation. But, if there’s one thing investors should keep in mind ahead of any Fed announcement, it’s that it is perfectly okay to ignore whatever is said.

With each meeting, investors find themselves on the edges of their seats thanks to the interest rate-hiking campaign the Fed launched over two years ago in its attempt to quell unbridled consumer prices. Raising interest rates to the highest level in nearly two decades made it more expensive for banks to borrow money, beginning a chain reaction of events at the end of which the American consumer was more incentivized to save their money rather than spend it, thus helping to slow down the economy and lower inflation.

Now two years removed from the Fed’s first interest rate hike, the economy is doing pretty well. The Consumer Price Index (CPI) has fallen to around 3.5%, a vast improvement from the 9.1% high the CPI reached in June 2022. Yet despite its efforts, the Fed has struggled to achieve its target rate of 2% as the costs of many goods and services remain elevated. Lowering the CPI to 3.5% is a significant improvement nonetheless, with many Americans now looking forward to the possibility of the Fed cutting rates.

Among other things, lowering interest rates will allow consumers easier access to credit and will result in lower mortgage rates, which could kickstart the limping real estate market, which is feeling the pain of the highest 30-year mortgage rates since 2007's subprime lending crisis.

However, Fed officials have remained vague on when it’s going to make its next move. Last year, it seemed as though the first cut would come before the year was through. But, in the last handful of meetings, the central bank has not adjusted its policy, leading some pundits to postulate that any rate cuts may not occur until the fourth quarter of 2024.

What does the Fed policy meeting mean for investors?

There are three possible outcomes for this week’s meeting: The Fed will announce a plan for its first interest rate cut, announce an additional rate hike before it pivots to cuts or the central bank's representatives will hold its current policy and play the “higher for longer” card. The scenario most are expecting is the third, with the Fed punting any decisions on rates until the June meeting. And while this week's likely indecision might cause short-term volatility on Wall Street, investors would probably do best to pay it no mind.

The last two FOMC meetings have seen short-term fluctuations for stocks; after the Fed held rates in January, markets closed lower. When it held rates in March, markets closed higher. But whatever they may do in April and May, it’s worth reiterating that short-term volatility shouldn’t influence investing decisions — hence the persistence of the old adage, time in the market beats timing the market.

Jason Heller, executive vice president of financial services company Coastal Wealth, says that despite the importance of interest rates for the market, the company advises against “significant portfolio changes based on what the Federal Reserve does or doesn't do over the short-term.” Heller adds that “the stock market has remained resilient even with high interest rates.”

Heller's advice against short-term trades speaks to a general rule of thumb that long-term investors tend to see better gains than short-term traders who try to get ahead of the market. By and large, portfolios that hold value stocks for long periods of time see less risk and perform better than portfolios that try to time and beat the market with short-term trades.

Indeed, the stock market thrived in the first quarter of 2024 even as rates remained elevated and will for the foreseeable future. So far this year, the S&P 500 has increased 7.6% and the Nasdaq Composite is up 7.9% despite investors being disappointed twice after FOMC meetings failed to provide any clarity about when the Fed will adjust its interest rate policy.

So, while you may see some rockiness or even a quick boost to the market after the final decision this week, there’s no reason to hit the panic button and make moves to your portfolio that distract from your long-term financial goals.

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