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What does Fed tapering mean for me?

| September 16, 2013

The Federal Open Market Committee (FOMC) will be meeting this week as they regularly do eight times a year. The issues discussed in these meetings are always carefully watched by market participants, especially the financial news pundits. The post-meeting statement is always carefully framed by the FOMC, and it has become the de facto method the Fed uses to communicate to the markets what its intentions are with the tools it uses to control interest rates. Reading between the lines of the Fed’s statement is the “tea leaves” equivalent of forecasting what the Fed is thinking. Many of the talking heads in the financial news industry (whose goal it is to make major news out of everything) will likely try to inject all kinds of spin and speculation into the statement this week.

Eyes will be on the FOMC’s statement for any language that has to do with “tapering” -- the buzzword for reducing the massive asset purchase program the Fed has been employing to stimulate the economy. What the FOMC decides to do about tapering, and how their decision or “between-the-lines” interpretations will affect the markets short term, is anybody’s guess. Earlier this year, the mere suggestion that the Fed would ease ended up sending interest rates upwards and bond values downwards. 

The thing is, much of the Fed’s future tapering and rate changing could already be priced into the market. Trying to time the market before the meeting is a risky way to build wealth. Sure, if the percentage the Fed intends to reduce by is surprisingly large or small, the markets may move in reaction (which would only be a resetting of market expectations), but a “surprise” is unpredictable by definition. Long term, properly-allocated and well-diversified investors shouldn’t make any decision based on the Fed’s guidance (large or small). Staying the course on a well-thought-out investment plan means letting the speculators worry about the Fed!

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