While interest rates remain at an all-time low, big changes are coming as the Federal Reserve plans to implement hikes starting this year and continuing into 2024. In this segment of Backstage Pass, recorded on Dec. 15 shortly after the Fed's announcement, Fool contributors Rachel Warren, Danny Vena, and Connor Allen discuss these upcoming interest rate changes designed to combat inflation and how they plan to invest in this changing environment.
10 stocks we like better than Walmart
When our award-winning analyst team has an investing tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now... and Walmart wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Stock Advisor returns as of 6/15/21
Rachel Warren: Today marks the end of the Federal Reserve's much anticipated two-day meeting about inflation. We just learned the other day that inflation is at a 40-year high. Investors have been waiting to see how fast in the U.S. Central Bank going to raise interest rates and speed up the tapering of it's bond buying program that it put into place in the earlier days of the pandemic.
CNN noted in an article published earlier today, "despite the booming economy and the red hot inflation up until very recently, the Fed was buying a staggering $120 billion of mortgage and treasury bonds a month."
"Wall Street", and this was before the results came out this afternoon "had been pricing in at least two interest rate hikes next year, a big reversal from earlier this year when many assumed the Fed could stay at zero until 2023."
Well, the Fed concluded it's two-day meeting this afternoon and as suspected, we are actually in for some big changes in 2022. The market did respond pretty positively to the news though. The S&P 500 was up after the news. The Dow one point popped by about 100 points. After the Fed released it's conclusions, I found that very interesting. I'll be interested to hear both of your thoughts.
The Federal Reserve, they released a statement and this is a part I wanted to highlight as well for investors. The Federal Reserve they said, "In light of inflation developments and further improvement in the labor market, the committee decided to reduce the monthly pace of it's net asset purchases by $20 billion for treasury securities and $10 billion for agency mortgage-backed securities."
Beginning in January, the committee will increase its holdings of treasury securities by at least $40 billion per month, and its agency mortgage-backed securities by at least $20 billion per month.
Essentially, this puts the Fed on track to finish it's bond-buying stimulus program by early next year, presumably in the month of March. The benchmark interest rate will stay close to zero for now, which I would note that rate is at a record [laughs] low level. Projections show that the Fed could implement three rate hikes next year, a similar number in 2023, and then two in 2024.
Projections now are saying the benchmark interest rate could reach 0.9% next year, which would be up a bit from its current rate around zero and 2% by the conclusion of 2024, so a gradual hike there.
This seems like a balanced approach to dealing with the current rate of inflation without putting the market into a tailspin or completely blowing Wall Street's expectations out of the water.
But what are your guys' thoughts on this and will this impact how you invest over the next few years? Connor.
Connor Allen: Well, I think the Fed and this is pretty known at this point. The Fed started to see inflation spiraling a little bit faster than they anticipated. They decided to start the taper a little bit faster. Yes, it helped sink some stocks that I own.
But overall, I approve this. I think that this brings some stability to the market and it also just improves the overall health. Starting to taper this a little bit, even though it affects my stocks poorly, but at the same time, it gives you opportunities to buy them at lower prices. I think that the market appreciates stability overall.
This was anticipated what they did and what they came out with today, and the market approved of it because that's what everyone expected. Now, if the Fed were to go out there today and do something that nobody expected, stocks probably would have fallen quite a bit, so it's exactly what everyone anticipated.
But as far as my investing strategy, anything that I'm changing, no, I'm not changing anything that I'm doing. The reason for that is that the companies that I invest in, they're my best vision of the future, is how David Gardner says it.
Honestly, small incremental changes in interest rates aren't going to affect what my vision of the future is and the companies that are in it and they'll succeed or they won't, but I'm not changing anything.
Rachel Warren: Excellent. What about you Danny?
Danny Vena: I didn't want to bury the lede, so I'll just come out and say it now. I rarely let macroeconomic factors change how I invest. I buy stocks, I add to my portfolio week in and week out, month after month, year after year, good times and bad, because I invest in strong businesses and I add to them over time and as a result of that, I don't even have to be right all the time.
I think I'm right probably 60% of the time, which is still not too bad. That has proven to me over the past more than a decade of investing that, that strategy works. Now, I agree with much of what Connor said.
The Fed signaled the plans multiple rate hikes. Over the next year to combat inflation, it's going to accelerate its tapering of asset purchases and the market seem to respond positively. The Dow was up 1% for the day, the S&P was up 1.6%, the Nasdaq was up 2.1% and like I said earlier, the market hates uncertainty.
The market wanted the Fed to do a certain thing. The Fed actually coincided with what the market wanted at this point, so this is good, but I want to emphasize that whatever your investing strategy is, please do not let it be impacted by whether or not the Fed changes interest rates. Whether or not the Fed tapers its asset purchases faster or slower. If you invest in the best companies out there, it's not going to make a bit of difference.
Rachel Warren: Yeah, I think that's a really great point to make. It's like these are things that we need to be aware of as investors. The point that both of you made that the market responded really positively. There has been this fear and trepidation, I think among investors about what's the Fed going to say in its final pronouncement for the year.
But I think what was interesting here is even though yes, that tapering is going to accelerate faster and yes, we are going to be seeing some interest rate hikes over the next few years, which could cut into some stocks' performance in particular sectors, such as real estate, for example, in the short-term, at least. I think what this really showed is that the market values stability more than ever right now. We're in a time where there are many things that are unpredictable, from supply chain bottlenecks to job numbers, to the ongoing pandemic.
These are a lot of uncertain factors that have lent themselves to tremendous market volatility. I agree very much with what both of you were saying was even though, maybe this is a little bit of mixed news for some investors. In the short-term, not only will really great companies continue to succeed, but that level of stability and that added surety of, we know now this is exactly what's going to be happening in the coming months and years. I think that's great. I think that's something the market will adjust to.
It's something that investors can plan for. I viewed this news overall as a very positive thing. I thought that it was key here that yes, the Fed speeding of tapering it's going to finish that up faster which is something we have been anticipating for a bit now. Yes, we are going to be seeing some interest rate hikes, but it's not something that's happening all at once.
Right now, they're keeping the benchmark interest rates at the record lows we've been seeing. I think this gives time for the market and investors to adjust to the idea and I think that the fact that they are doing this, not all at once and in an even-keeled manner, is going to help a lot.
That gave me a lot of assurance, but as far as for my pattern of investing, likewise, it doesn't change how I invest. I think there might be certain sectors as interest rates rise that I might be more prone to put more capital toward. I'm a healthcare writer. here. I talk a lot and invest in and write about healthcare stocks a lot and this is a very resilient industry in a wide range of economic conditions.
Primarily because these companies are typically the ones that provide the services and products that people need, no matter what is happening in the world, no matter what is happening with the stock market or the economy.
People need their medications, surgeons and hospitals need medical devices that they use to perform procedures, and so I find that companies in that area tend to perform really well during uncertain periods.