What’s the Fed Going to Do Next?

The talk about what the Federal Reserve Open Market Committee (“the Fed”) will do next is a fascinating example of investor behavior. The days leading up the Fed meeting and decision announcement is filled with speculations about what’s going to happen next. The Fed has been so involved in driving capital markets these past several years that some of the talk about it is ridiculous. One Fed watcher at the Wall Street Journal says everyone is waiting to see if they continue to use the words “considerable time”, or not. Another article argued it’s not about “considerable time”, but something else.

None of it matters.

None of the people talking about what the Fed will do next know what they will do. They also don’t know how markets will respond to it.

That’s all that matters.

The only thing that matters is the directional trend. There are an infinite number of time frames for a trend. For example, I’ve drawn a chart below for the popular large company stock index, the S&P 500. Over this period, it’s trend is up. It has moved up and down over shorter time frames, but overall the recent trend is up. Stock investors should focus on the direction of the trend, and identify and react when it changes.

S&P 500 Stock Index 2014-09-17_14-55-54

source: http://www.stockcharts.com

We can say the same for other markets. The Fed decisions drive certain interest rates that impact global markets. That necessarily means their actions may impact currency (the Dollar), bonds, commodities, and alternatives like volatility and real estate.

I focus on the directional trend. I’m never trying to figure out what’s going to happen next. Instead, I know exactly what I’ll do at certain prices. I’ll exit to cut a loss here, enter a new trend there, or take a profit.

I don’t need to know what they’ll do. I only need to know how the trend will respond to it and how I’ll respond to any change in that trend.

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