RANDY FREDERICK: This year’s long-awaited, highly anticipated Fed rate hike finally arrived on December 14. Kathy Jones, Schwab’s chief fixed income strategist, joins me for the December 20 Schwab Market Snapshot to discuss the Fed’s plans going forward, and what it means for bond investors. Welcome back, Kathy.
KATHY JONES: Thanks for having me, Randy.
RANDY: So, Kathy, last week’s rate hike was so highly anticipated that virtually no one was caught off guard. But the markets were a bit unnerved about the Fed’s plans for 2017. What did Fed Chief Janet Yellen say, and what does it mean for fixed income investors?
KATHY: Well, what Fed Chair Yellen emphasized was that the rate hike reflected the improving trends in the economy. So inflation has moved back towards their 2% target, economic growth picked up in the second half of the year, and unemployment is quite low. And that’s why they raised rates. But she also went on to emphasize that we shouldn’t be taking the Fed’s forecast for rate hikes in 2017 too literally. The Fed can only go on the data that they have and the estimates that they’re making about the future, but they remain flexible because if the numbers change they’re going to change their plan. And if you remember, they came into this year expecting to make four rate hikes, and they only raised rates once. So we should be prepared for higher rates, but we certainly should be not too surprised if it doesn’t work out that way.
RANDY: Well, now, I think most people associate higher interest rates with falling bond prices. So what should bond investors do in 2017 if interest rates continue to rise as expected?
KATHY: Well, one thing you can do right now is to have one of our fixed income specialists run a portfolio analysis for you. And that will let you know where you stand today in terms of the duration in the portfolio and the credit quality in the portfolio. And then if you want to mitigate the impact of rising interest rates, you can shift to shorter-term bonds from longer-term bonds, perhaps, or look at some floating rate notes—which tend to do well when interest rates rise. So, in general, you need to be prepared for the rates to move up and to have some flexibility in the portfolio. But also keep in mind that as interest rates go up if you’re a longer-term investor who is looking for income, this could be an opportunity to add some income to your portfolio as we approach, say, you know, a higher level of interest rates.
RANDY: Well, now, you mentioned earlier that the Fed was obviously way too aggressive with their forecast for 2016. What is our outlook for 2017, and do we think the Fed has it right this time?
KATHY: I think estimates for hiking rates two to three times in 2017 are reasonable, based on the information that we have right now. And I think that, again, as the data play out, there are a lot of policy decisions that are up in the air right now in terms of tax policy and regulatory policy, and trade policy. So I think we need to be prepared for higher volatility, as well as for higher interest rates.
RANDY: Well, as always, Kathy, thank you so much for your expert analysis. That’s all the time we have for today. Listen, if you have questions about investing in bonds, please call and talk to a Schwab financial professional. You can read more from Kathy in the Fixed Income and Insights section of Schwab.com. You can follow Kathy on Twitter @KathyJones, and you can follow me on Twitter @RandyAFrederick. We’ll be back again. Until next time, invest wisely. Own your tomorrow.