When will the Fed stop raising rates?

Hi Reader,

The Fed raised interest rates half a point yesterday to the highest level in 15 years.

This is the 7th rate hike this YEAR, indicating that the fight against inflation is not over.

When will they stop these rate hikes?

How should retirement investors be thinking about the current Fed policy?

Today I'm going to to share my thoughts and remind you of a common investing misconception.

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When Will the Fed Stop Raising Rates?

In Howard Marks' recent memo, he shared a summary of conversations he had when the Fed began raising rates for the first time following the Great Financial Crisis:

In late 2015, virtually the only question I got was "When will the first rate increase occur?" My answer was always the same:

Why do you care? If I say 'February,' what will you do? And if I later change my mind and say 'May,' what will you do differently?

If everyone knows rates are about to rise, what difference does it make which month the process starts?

No one ever offered a convincing answer. Investors probably think asking such questions is part of behaving professionally, but I doubt they could explain why.

Given the Fed's prominent role in the markets -- and their actions yesterday -- it's not surprising that I'm regularly asked, "When will the Fed finally stop raising rates?"

I think Mr. Marks' conversation template can be helpful here:

If we knew the Fed would be done raising rates by February, what would we do?

If instead, it was May, what would we do differently?

What if we knew the Fed would raise rates by just two more percent, how might we respond?

Would investors consider this to be a victory or a sign of more pain to come?

Would that tip us into a recession, or would knowing this offer a reprieve, given that the end is in sight?

What if they raise rates by 3% more? Or 4%?

Bonds and Interest Rates

I know what you might be thinking:

"Bonds lose money when interest rates rise. So, if I knew rates would continue to rise, I would stay out of bonds."

However, as noted in my recent podcast episode, Should Retirement Savers Own Bonds, the interest rate set by the Fed is NOT correlated to bond yields or future bond returns.

The fed funds rate is the interest rate that banks charge each other to borrow or lend excess reserves overnight.

It might influence bond yields – especially when the Fed makes a major policy shift and shocks the global markets – but it doesn’t control or decide them.

And we're witnessing this in real time RIGHT NOW.

The Fed has raised rates 2x since November...

...yet long term treasury bonds have returned +12%.

So, again, even if you knew that the Fed would continue raising rates, how would you respond?

Fed Opinions

As you consider these questions, I think it's obvious that they are impossible to answer with any level of certainty.

If that bothers you, think about this:

The Fed doesn't even know what the Fed is going to do.

Surely, we could come up with some educated opinions for what might happen in each of these cases, but we'd have to ask ourselves whether these opinions would do us any good.

It seems doubtful at best.

One thing we know about most forecasting (guessing) is that the probability of being wrong is high, and the costs for being wrong are potentially permanent.

That doesn’t seem like a risk worth taking.

As long-term investors, we aren't seekers of opinion.

We are seekers of wisdom.

And just like most wisdom, it's usually not a medicine that tastes very good.

That is, waiting it out continues to be our best option even if that means it’s uncomfortable.

All of history has shown that these short-term uncertainties have a way of working themselves out in the end, so it’s reasonable to think that it will be the same with this one as well.

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Taylor Schulte, CFP®

Taylor Schulte