On December 16 the Federal Open Market Committee (FOMC) announced its decision to increase the federal funds target rate from its targeted range of 0.25%-0.50%, to 0.50%-0.75%.

The move marked first increase since the previous December. Analysts at the time had predicted that the Fed would follow up with further increases throughout the year and that interest rates in general would also begin to rise. But these forecasts proved to be wrong. Rates have varied considerably over the past 12 months, and yields on intermediate and longer term bonds actually fell through the first six months.

Rates across the yield curve began increasing at the beginning of the fourth quarter. The rise may have been in anticipation of the Fed’s recent announcement, based on previous signals from its members. On the other hand, the FOMC is influenced by capital market changes, so the direction of cause and effect is difficult to assess.

While we are skeptical of any particular analysis that claims to unravel the mystery of interest rate fluctuations, changes we are confident that lenders and borrowers estimate the likelihood of outcomes based on publicly available information, and that their collective expectations are reflected in current interest rates.

Where does this leave the household investor? Investors in need of income should not reach for yield by extending the maturity of their fixed income holdings, nor should they assume greater credit risk. The asset classes we recommend include intermediate term bonds as well as income generating equities. We hasten to remind our readers that cash flow need not be derived from interest payments or dividends. Equities are purchased in anticipation of capital appreciation, so it is entirely appropriate to liquidate stocks or equity mutual funds in order to cover expenses.

Also In this Issue of Investment Guide

Yes, Virginia, There will be a “Correction”
The Art of the Soundbite
The Back Page Explained
AIS Predictions for the Year
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow Jones Industrials Ranked by Yield
Recommended Investment Vehicles