Does the Federal Fund Rate Matter? 🏦


Let's start with $AAPL earnings. Wall Street seems to be loving the earnings. Since Apple is my largest holding, my portfolio is having a great day and a great end for this volatile month of July. Personally, I'm pleased with the earnings but not really so focused on it since I am focused on the long-term performance of the company.

Does the Federal Fund Rate Matter? 🏦

The one thing in the mind of most investors today is whether the Federal Reserve System(FED) will keep interest rates at the same level, lower it by 0.25% or 0.5%. I am not someone who can tell you what the FED should or should not do. They are more qualified people although I do believe that keeping interest rates low for so long is not a good idea. What I want to tell you is how this will affect investors.

First, you should understand that the FED has a dual mandate unlike most Central Banks. The FED needs to keep unemployment low and at the same time keep inflation low. Right now, both inflation and unemployment rates are at records low. This is not the typical situation with the economy doing great, the stock market $SPX500 at all time high, bond yields are very low(in many countries yields on bonds are actually negative).

If you are a defensive investor, then the interest rates matters a lot to you. If you hold 80% stocks and 20% bonds, with a rising interest rates, it will be time to buy more bonds because bonds are going to have a larger yield. But for entrepreneurial investors, it is not so important. You should be able to find good stocks whether interest rates go to zero or to 15%. An intelligent investor will always find good opportunities. Let's take for example, JPMorgan Chase $JPM , one of the stocks in my portfolio. Usually low interest rates are not a good thing for banks but JPMorgan Chase has been doing great since the last financial crisis. A great business will always do great whether interest rates are low or high. Of course, it is important to consider how much debt they have since a company with a lot of debt won't do well in a high interest rate environment. You should also not forget that investors are irrational. I may be telling you that interest rates are not really that important but it won't happen in practice. If interest rates rises, investors will sell stocks. You should then take that opportunity to buy stocks at a discount.

To conclude, interest rates give you an indication of the market but it should not affect the way you analyze companies. It is not because interest rates are at 15% that Coca Cola $KO will stop selling coke.

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