Amid the oracles’ frenzy over the Federal Reserve Board’s next move, municipal bond investors would be wise to continue doing what’s worked for them all along: Ignore it.
It’s just not relevant.
Forecasters have spent more than 40 years inaccurately predicting how and when interest rates might change, providing endless headline fodder for those who treat investing like a horse race. 
They’re agitating today because the Fed has signaled it might bump rates sooner than it originally planned.
For municipal bond investors, the conjecture is interesting and even mildly entertaining. Ultimately, though, it’s beside the point. The short-term, day-trading perspective prominently featured by seers online and on TV is antithetical to successful muni investing.
What Fed rates influence
Investors immersed in the cacophony lose sight of a fundamental fact: The Fed influences rates on the shortest end of the market. Its goal is to tame the economy and prevent long-term inflation.
How will this affect the municipal bond market?
If the Fed is successful, long-term yields – which muni investors heed – will decline. In the short-term, however, municipal yields have been ticking up, as regular investors know and have taken advantage of.
How else might the Fed’s actions affect the municipal bond market?
Generally, state and city finances look solid, as we’ve noted (“New Infrastructure Law’s Impact on Municipal Bond Market”). The impact from the pandemic wasn’t as severe as many predicted and federal aid helped. The state of Minnesota even has a $7.7 billion surplus and is considering a record $2.7 billion capital bonding package, according to The Bond Buyer.
After a year of pouring cash into the municipal bond market, will investors’ enthusiasm continue? Demand has far outpaced supply (“Time to Rethink Municipal Bond Issuance”), and we continue to see a robust appetite for bonds.
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What munis do
Investors spare themselves of having to follow the latest guessers because they’re not looking for roller-coaster gyrations and headline-grabbing attention from their municipal bonds. Capital gains aren’t their primary focus.
Instead, they want their munis to do one thing well: Generate a steady stream of tax-free income.
When investors open their monthly statements, they know market values fluctuate. Sometimes their bonds may be worth more than their purchase price, other times less. When their bonds are called or mature, they want their principal returned – and to enjoy tax-free income along the way.
This simple proposition doesn’t lend itself to on-air screaming matches and bold proclamations on Fed rates. In the case of municipal bonds, incessant speculation is useless and misleading, and investors should treat it accordingly.
