Interest rates aren’t going anywhere fast.
That was the message from the Federal Open Market Committee.
After its two-day meeting Wednesday, the Fed said a slowdown in economic activity prompted it to hold the target range for the federal funds rate at .25% to .50%.
It noted that “growth in household spending has moderated, while business fixed investment and net exports have been soft.” Inflation remains tepid, running below its 2.00% target rate.
The meeting comes on the heels of last month’s announcement that instead of raising rates four times this year, as its data previously indicated, it would do so only twice.
Weak GDP growth
For rate-conscious municipal bond investors, this should reinforce the point that there are no signs of a looming, dramatic spike. As always, holding cash in hopes of such a signal is a money-losing exercise.
Reinforcing the Fed’s view, the Commerce Department released its first quarter data Thursday that showed the gross domestic product grew by just .5%. In the fourth quarter of 2015, real GDP increased 1.4%.
Consumer spending rose 1.9% in the first quarter, compared with 2.4% in the fourth quarter of last year. Businesses curbed investments by 5.9%, the biggest drop in almost seven years, as oil prices remained low and global markets continued to demonstrate weakness.
The Commerce Department’s data is considered preliminary and will be revised twice more.
Avoid guessing
Successful municipal bond investors don’t hinge their investment decisions on where they guess interest rates are headed or reading the minutes of Fed meetings.
It’s a message we reiterate often as investment savants continually promote the notion that clairvoyance is the basis of a sound investment strategy.
Instead, the path to maximizing tax-free income is simple, and its first precept is: Don’t forego a steady stream of tax-free income, regardless of where so-called experts think interest rates are heading.
