3 Things to Do Before the Fed Changes Its Mind About the Taper

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Marriner S. Eccles Federal Reserve Board Building, Washington, DC, dc124627
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On Wednesday, just about everyone in the financial community expected Ben Bernanke and the Federal Reserve to signal the coming end of their extraordinary measures to support the American economy. Yet at its most recent meeting, the Fed chose to make no change to its monetary policy, continuing QE3, its quantitative-easing program that's designed to keep the money supply loose, the economy growing, and interest rates low.

But if you think QE3 sounds more like a cruise ship than a way to help the U.S. economy, all the intricacies of Fed policy boil down to one question: What should you do with your money now?

Here are three things you need to consider strongly before the Fed changes its mind and starts doing what most experts already expected it to do.

1. Take One Last Look at Refinancing

The most visible sign of quantitative easing's impact for ordinary Americans is the plunge in mortgage rates in recent years. Interest rates at or near record low levels made homes more affordable and allowed many homeowners to cut their monthly payments by refinancing existing mortgages at lower rates.

Yet more recently, mortgage rates have risen sharply in anticipation that the Fed would reverse course. That sent refinancing activity to its lowest levels in four years, according to the Mortgage Bankers Association.

After the Fed's latest meeting, mortgage rates moved back downward. Even though they're still a bit more than a percentage point higher than the extreme lows we saw not many months ago, temporarily cheaper mortgages make refinancing an option again for some of those who didn't act earlier. Now's a good time to see if refinancing can still help you, as rates will likely resume their upward trend once the Fed starts easing off the stimulus accelerator.

2. Reduce Rate-Risk in Your Investments

Low rates also helped investors by boosting the value of the long-term bonds in their portfolios. When interest rates were falling, bond investments got more valuable, helping boost overall returns. Yet the same bonds that gained the most in good times have seen the biggest losses in recent months.

The Fed's move gave bond investors some respite, but the smart long-term move is to evaluate the bonds in your portfolio and seek to make your bond positions more conservative. By favoring short-term bonds, you can avoid getting locked into an unfavorable rate for a long period of time, and perhaps also avoid some of the losses that long-term bond funds will suffer if rates continue to rise.

3. Prepare For Future Skittishness in the Stock Market

It's important to recognize the Fed's move not as a major shift in strategy, but rather as a decision related to timing. The central bankers still want to stop doing as much as they've been doing to support the economy, but they don't want to pull back too soon and risk undoing all the progress they've made.

What that means is that in future Fed meetings, the same issues -- whether, when, and how much to cut back on stimulus programs -- will keep coming up. Investors will get edgy about the possible impacts of Fed policy changes on their portfolios, and that will inevitably cause turbulence in the stock market.

As an investor, you need to prepare yourself for those ups and downs. Even better, put yourself in position to profit from them when they come by having cash on hand to take advantage of temporary bargains -- and by being ready to sell vulnerable positions during short-term bumps higher.

Don't Wait

The Fed's decision not to throttle back on its low-rate policies gave procrastinators one more chance to reap the financial benefits of low rates. By taking these three simple steps, you can get a last-gasp chance at savings while also reducing the risk of easily avoidable investment losses once the Fed moves forward with its long-term plans.



You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger or on Google+.

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