The Federal Reserve continues to grapple with too-high rates of inflation. As we described in our economic and market outlook for 2023 [61-page PDF], we believe that rapid monetary tightening aimed at bringing down inflation will ultimately succeed but at the cost of a global recession in 2023. Restrictive monetary policy stresses the banking system and slows credit formation. The tension between the Fed’s inflation-fighting mandate and its financial stability goal likely could spur greater market volatility in the coming months.
Fed policymakers next meet May 2 and 3. Vanguard expects them to raise their target for short-term interest rates by 25 basis points (0.25 percentage points), to a range of 5%–5.25%. Policymakers are likely to raise rates another time or two this year and then maintain their peak rate target until 2024.
For investors, unexpected and fast-moving economic or financial market news can be disquieting. In the vast majority of cases, however, we believe that investors benefit in the long run by sticking with well-considered financial plans and portfolios.
We believe investors should focus on:
- Aligning their asset allocation with their risk tolerance.
- Controlling costs.
- Adopting realistic expectations.
- Holding broadly diversified funds.
- Maintaining discipline.
In general, investors should change their portfolios only when there are meaningful shifts in their investment horizons, goals, or financial circumstances, and not in response to short-term market conditions or performance.
Investors who work with financial advisors may want to speak with them for personalized advice. Do-it-yourself investors who find the economic and market news worrisome may want to consider the benefits of Vanguard's advice services.