Will Increased Fed Transparency Impact Investor Decisions?

Brittney Barrett |

U.S. Federal ReserveLate Tuesday, the Federal Reserve announced their intention to beginning publishing interest rates in advance of their changing in order elicit an investor response they believe will be beneficial. Federal Reserve minutes and announcements have consistently influenced the actions of investors as a result of their impact on inflation and economic activity. In the year since the recession struck, interests rates have remained near zero, with the markets always responding negatively when a change is in question.

The decision for greater transparency was reached in the most recent Federal Open Market Committee's policy making meeting in early December, but was not revealed until Tuesday afternoon, when the minutes were made public. Many market watchers can be expected to rejoice regarding the decision from the Fed, as it removes a major variable that tends to result in short-term market volatility.

The first published forecast from the Federal Reserve will take place in late January, a move that the group expects will help shape investors expectations and outlooks and allow them to plan more effectively for the future. For the short term, investors should not expect a breakthrough announcement regarding interest rates though if the most recent minutes are to be trusted. Instead, it appears as though the short term interest rate will maintain current levels until the middle of 2013 with the intention of keeping borrowing costs low and potential stimulating the slow growth.

The impact this would have on borrowing cost will likely be low as it has done little to stimulate the housing market thus far as banks require more up-front money for loans. Additionally, there appears to be a public division about the long-term impact of keeping rates at their current level.

The zero interest rate is causing inflation to rise and depreciating, on a long term basis, the wealth and retirements funds accrued by older Americans. This has resulted in a division regarding the best plan of action and there could be potential arguments in the future of the Fed. The most recent meeting saw several of the ten person committee supported to measures to help the economy while others rejected it.

The disagreements make it difficult for economists and investors to read into the future decisions and invest accordingly. In the event that ongoing economic supports are put in place, much to the chagrin of Americans fearing the long-term dollar value, then investors may want to put their money in ETFs in the agricultural sector like PowerShares DB Agriculture (DBA) or TIPs, inflation protected bonds like iShares Barclays TIPS Bond Fund (TIP).

If the Fed discontinued measure or changed the interest rate there are certain stocks they may want to short equities. The new transparency offered by the Fed will allow them to act in advance of these rather than when they occur.

Furthermore, the forecast being offered by the Fed will also include an existing group of forecasts regarding future economic prediction. While some top managers will be making their own assessments concerning equities and assets others may want to consult the Fed before making their long and short-term investments.

So far, they may want to hold off in investing too enthusiastically though, the Fed was honest about their weak unemployment outlook and fears surrounding tepid economic growth for the coming two years.

More information will become available on Jan. 25, when the group publishes their first forecast. The Summary of Economic Projections, as it is called, will include data concerning projections surrounding the level of the target federal funds rate for Q4 of this year and for the next several ears. Projections of future economic performance will also influence the target rate and as a consequence impact the way investors position themselves. There should be considerably evidence provided shedding light on the reasoning behind these economic conclusions. Depending on how credible Wall Street finds that that first set of qualitative data,we'll be able to more accurately success the long-term impact of the new transparency.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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Symbol Name Price Change % Volume
RTN Raytheon Company 149.92 0.68 0.46 1,133,524

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