Just when everyone thought they knew exactly what the Federal Reserve was going to do, Ben Bernanke and his Federal Open Market Committee peers, threw investors another curve ball. Defying expectations to reduce the amount of money it's spending buying bonds on the open market, the Fed kept its policies unchanged. In response, stocks soared, bond yields plunged, and gold looked a lot shinier.
Fed Chairman Ben Bernanke. Source: Federal Reserve via Wikimedia Commons.
Given the impact you've seen on your investment portfolio this week, it's clear the Fed plays a big role in the markets. But the other big question is how the Fed decision affects what you should do with your personal finances. Let's look at three areas worth looking at now.
1. Get ready for the next time investors panic about what the Fed will do.
In the aftermath of the decision, it's become increasingly clear that the Fed doesn't intend to keep buying bonds forever. Indeed, St. Louis Fed President James Bullard reminded investors on Friday that a decision to cut back on its quantitative-easing activity could come as soon as late October, when the FOMC next meets.
But for now, most investors are ignoring that fact. Expectations of future volatility have fallen dramatically, with the iPath S&P 500 VIX ST Futures ETN (VXX +0.00%) falling to its lowest level ever on Thursday, signaling a lack of fear in the market.
Inevitably, the Fed will have to decide on how to time its pullback from its various policy measures. When investors realize the implications at stake, they'll have many of the same concerns they had before the Fed's latest meeting -- and stocks could see similar drops to what we saw in June and in August. Being ready to deal with, or even buy into, market turbulence could help you sleep a lot better before the next Fed meeting.
2. Cut your monthly mortgage payment if you can.
The Fed's biggest victory has been keeping mortgage interest rates down. By doing so, the Fed avoided one of the potential catastrophes that could have emerged from the housing crisis, as many homeowners were able to refinance and save hundreds or even thousands on their monthly mortgage payments thanks to rock-bottom rates.
Fears of the end of quantitative easing sent rates soaring and put a near-stop to refinancing activity. Wells Fargo (WFC +0.88%) and JPMorgan Chase (JPM +1.29%) have both noted the impact of higher rates on refinancing activity, and it has had big implications on profits of those banks.
For you, though, the key question is whether the Fed's pause will send rates low enough to make refinancing profitable. If you refinanced recently, it's unlikely you'll get a better deal. But if you haven't refinanced in the past few years, then this latest dip in mortgage rates could be your best chance to earn at least some savings on your payments before rates go up and stay up for good.
3. Make sure your bonds won't bite you.
For years during a turbulent period for the stock market, bonds delivered solid returns. Yet, in recent months, as confidence in the Fed has wavered, bonds have seen their prices fall dramatically. The long-term bond ETF iShares Barclays 20+ Year Treasury (TLT 0.09%) plunged 17% between early May and late August, as yields on 10-year Treasuries soared to the 3% mark for the first time in years.
Not all bonds suffered such huge price declines. In particular, short-term debt has held up relatively well, with minimal losses for the most conservative bond funds. The trade-off is that they don't pay as much in interest, but the difference between getting 1% and 3% annually in interest payments isn't nearly enough to make up for double-digit percentage losses from taking on too much bond risk.
Take this last-chance opportunity
If you haven't done these things already, the Fed's pause helped you dodge a bullet. But don't expect another chance. Take action now and make sure you won't regret missing out on your opportunity to save and profit from low rates.
