Hey long-term investors! Did you hear that the Fed lowered interest rates today?
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Good, it's always smart to keep up with the news.
Now get on with your life. The fact is, for most investors, today's news shouldn't prompt any big changes in your portfolio -- at least for now.
Federal Open Market Committee cut its key
federal funds target rate -- the rate banks charge to lend money to other banks overnight -- by 50 basis points, to 6%. It also cut the discount rate -- the rate it charges member banks for loans -- by 25 basis points, to 5.75%.
Why? The idea is that with lower rates, companies may be willing to take on more credit to expand their business. That means more growth. Lower rates may also mean that individuals will increase their borrowing and spending. This again should affect a company's performance and, hopefully, translate into higher stock prices.
It's no surprise, then, that stocks rallied on the news, with the tech sector seeing the biggest bump.
But how does this affect your long-term outlook? It doesn't. Sure, on a short-term basis you may feel a difference -- maybe a bump in your favorite stock's price, maybe a slightly better rate on a new mortgage or loan. But should you adjust your portfolio because of this drop in rates?
Nope. Over the long haul this little decrease will be a blip on the charts.
Will this be the catalyst the market needs to get it roaring again?
Hardly -- at least, not all by itself.
Speculation that the Fed would lower rates had risen over the past week, and while the pre-emptive move was a surprise, the market knew something was coming. We need the Fed to lower rates a few more times, but even that in and of itself may not be enough to spark any kind of market boom. When you look out across the market landscape, we still have a weak earnings outlook, declining consumer spending and sagging investor sentiment. This Fed move sparked a nice bump, but only time and future economic data will tell whether it can help put the economy and the markets back on the up and up.
So sit tight. Stay informed but don't react hastily. Just know that this is a step in the right direction and that your retirement account is safe.
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