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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15 Comments

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Kurt

Ken, you got it right, cut corperate wellfair! Government Waist and excessive military spending and policing the Wrold! which is costing the American Tax payers Billions each year and for what! I would also recomend inacting policy regarding the inability of our Government to govern.... if they can do the job then throw them out after 1 term and start with new blood.

October 31 2013 at 12:17 PM Report abuse rate up rate down Reply
godsgifttonature

Our federal reserve needs some help. Our government needs to cut back.

September 22 2013 at 1:13 AM Report abuse +1 rate up rate down Reply
Davie2743

Buy a home and invest in the stock markets.

September 21 2013 at 10:47 PM Report abuse +1 rate up rate down Reply
Sherrie Dobbie

I am laughing. What investments.So many of us are just trying to survive out here. Good luck to all you investors, though. I hope it works out for you.

September 21 2013 at 9:19 PM Report abuse +1 rate up rate down Reply
khemp13146

The fed is painted into a corner.If they stop the QE's the economy will tank and no one will buy the country's debt since the Chinese are tapped out.The only solution is political where the Gov .cuts entitlements.This won't happen so the next stop is Zimbabwe.

September 21 2013 at 8:58 PM Report abuse rate up rate down Reply
1 reply to khemp13146's comment
Ken

Cut waste and Corporate welfare

September 21 2013 at 10:48 PM Report abuse +2 rate up rate down Reply
smiles41

Three things to do: learn to speak English, get some ed/training, and get off the federal dole.

September 21 2013 at 3:08 PM Report abuse +1 rate up rate down Reply
ectullis

What stimulus?

September 21 2013 at 11:25 AM Report abuse +2 rate up rate down Reply
scottee

ummm...they are not tapering...

September 21 2013 at 9:24 AM Report abuse rate up rate down Reply
KATHI AND JOHN

oh come on.............can't they just keep helping their bud b.o..........it's all to make him NOT look so bad

September 21 2013 at 8:20 AM Report abuse +2 rate up rate down Reply
aftonmoon

Unfortunately for those who have 401ks where you cannot get out quick enough and where you would have to surrender a ten percent penalty you will al take another beating as once again the speculators run off with your money. QE is supporting the financial sector but has had little to add to the real economy. All that QE did and is doing is to provide free money to Wall Street speculators and bankers. Stock prices reflect only speculation and not improving fundamentals within the companies, while bond prices will fall with the increased interest rates. And QE will not stop because the economy is getting better it will stop when the Fed reaches its limit which it does have.

September 21 2013 at 8:14 AM Report abuse +3 rate up rate down Reply
1 reply to aftonmoon's comment
pdbocc

But you could switch your holdings from stocks to a more conservative mix that includes bonds, including government bonds without incurring a penalty.

September 21 2013 at 1:47 PM Report abuse +2 rate up rate down Reply