It’s useless to guess the Fed’s interest rate plans. Here’s why you should hang onto those dividend stocks.
The Fed finally put an end to quantitative easing. Now the question is this: When will it do the same with near-zero interest rates?
After six years and three rounds of bond buybacks, the Federal Reserve finally pulled the plug on its stimulus program last week. Now all eyes are squarely on short-term interest rates.
So, when will interest rates rise?
As they do every month, economists and Wall Street pundits have been feverishly trying to parse the words from the Federal Open Market Committee’s latest statement. Is the Fed hawkish? Is it ready to finally increase the Federal funds rate from near zero? If so, how close is it to doing so?
For its part, the central bank says that interest rates will likely stay low for a “considerable time.” However, it also acknowledged “substantial improvement” in the U.S. job market and overall economy, leading some to believe that the wait for a rate hike might not be that long after all.
Don’t get caught up in playing that game. Trying to read the Fed tea leaves to determine when interest rates will rise again is a fool’s errand.
The Fed has been teasing us with interest-rate hikes for more than three years. Consider the following timeline:
-August 2011: After nearly three years of saying that short-term interest rates would remain near zero “indefinitely,” the Fed projects that they will only remain that low through mid-2013.
-January 2012: Five months later, the Fed changes its tune, saying that interest rates will remain near zero through late 2014.
-June 2012: Ben Bernanke says that the Fed plans to keep interest rates near zero as long as unemployment remains above 6.5%. At the time, unemployment remained at a rather bloated 8.2%.
-September 2012: In another amendment, the Fed bumps the projected interest-rate hike back to mid-2015.
-December 2013: On his way out the door as Fed chief, Bernanke says that interest rates will likely remain near zero until unemployment falls “well past” 6.5%. The rate had just fallen from 7% to 6.7%. It’s now down to 5.9%.
In the span of less than two and a half years, the Fed’s end date for near-zero interest rates moved from mid-2013 to mid-2015. Even now, there seems to be little consensus on that mid-2015 projection.
That’s the inherent part of the problem with reading too much into the words of a committee comprised of 12 people with widely varying views on the economy. If the members of the actual FOMC can’t agree on a timetable for raising interest rates, then why should we as investors put much stock into what the head of that committee tells us every month?
More to the point: I wouldn’t go selling off all your dividend stocks just yet. With CDs, money market accounts and U.S. Treasury bonds offering little to no yield over the past six years, dividend stocks have been a valuable alternative when searching for yield. Even if the Fed does raise interest rates next summer, it will take a while for them to get from yields of 0.25% to anything substantial.
Fed officials project that the federal funds rate will hit 1.38% by the end of 2015 and 2.5% by the end of 2016. Right now, the average yield among S&P 500 stocks is 1.9%. In other words, we’re about two years away from short-term interest rates yielding more than your average dividend stock.
My advice? Don’t listen to what the Fed says about interest rates. I’ll believe they are raising rates when I see it. And even then, it’s going to be a long slog back to attractive yields from near zero.
Until then, keep holding onto those dividend stocks. Thankfully, the Fed can’t touch those.
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