The Fed meeting is at 2:00 p.m. Eastern Time tomorrow (12/19/2018) and the market WILL react.

What do you do?

At this point, analysts are almost evenly divided about what will happen to the markets after the Fed meeting.

There are three possible outcomes:

 

OPTION 1: The Fed doesn’t raise the interest rate and suggests the economy is weaker than everyone thought.

OUTCOME: Negative.

A bad economy is bad for everyone.

LIKELIHOOD: 5%.
The Fed going this route would indicate that Trump’s comments affect them and would make the Fed look as though it isn’t independent. To make matters worse, this route would make the world fear what the Fed sees as weakening the economy.

 

OPTION 2: The Fed raises the interest rate and commits to at least 3 additional rate hikes in 2019, claiming the economy needs to be cooled down.

OUTCOME: Negative.
Experts know the economy is cooling off already and don’t need the Fed’s help.

LIKELIHOOD: 35%.
In October, Fed Chair Jerome Powell said he believed he might have to “overshoot” the neutral interest rate in order to cool off the market. Many attribute his comments to causing the current bear market. He’s retreated from his initial comments slightly since then, but there’s still a possibility the Fed will go ahead with their initial plan (especially given their track record of being inept with terrible decisions on their part causing the Great Recession from 2008-2011).

 

OPTION 3: The Fed raises the interest rate and then takes a wait-and-see (or “dovish”) tone.

OUTCOME: ????
The market believes this is the decision the Fed will make, but taking a dovish tone suggests the economy is weaker than thought. Although this should be baked into the market, there is the potential for the reality hitting home causing some investors to flee.

On the other hand, the market is so oversold right now that this approach could cause the market to rebound with significant upside.

LIKELIHOOD: 60%.
Many analysts believe this is the”right” approach for the Fed, however who knows if the Fed will actually do the right thing here – they certainly have proven they can do the exact opposite of what’s needed in the past.

 

WHAT SHOULD LONG-TERM INVESTORS DO?

If you’re investing for the long-term, don’t panic and remember that market fluctuations are normal (even if they are incredibly painful).

 

 

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