Interest rates are the gas pedal of the economy, and the FOMC is in the driver’s seat. Since the Fed Chief is a presidential appointment, there tends to be a link between political ideologies and how the Fed comes down on certain issues, regardless of how many times the Fed claims to be apolitical. Investors must realize that interest rate risk is a salient factor in all types of investments, not just in securities such as bonds that pay investors in terms of interest rates. As with any type of risk, we can hedge against it using a simple process of intelligent portfolio design and allocation.
If this is done correctly, we should be able to weather any storm that the economy and the FOMC can throw at us. I believe it is an unseen benefit that we have the Fed and that the Fed has gotten much better at using its considerable power to control economic forces that keep economic slowdowns from turning into depressions. That sort of economic engineering is not without its perils, but as for me and my 401(k), we are grateful. So if your portfolio takes a hit because the fed decided to raise or lower rates, do not take it too seriously. An economic disaster like the Great Depression would be much, much worse for your portfolio.
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