Yesterday evening, I had the opportunity to attend a lecture by Lord Mervyn King, Governor of the Bank of England from 2003 to 2013. He is currently a Professor at NYU Stern where I am an Adjunct Professor, teaching private wealth management to MBAs.

During the question and answer session with faculty and grad students, the topic of current central bank interest rate strategy came up. He noted that standard economic theory states that growth can be stimulated through low interest rates. Professor King then made the astute observation that if low rates for the last eight years have not generated significant growth, maybe low interest rates are no longer the solution.

TIME TO TRY SOMETHING ELSE

He finished his off-the-record remarks by hypothesizing that maybe if the Fed announced that they would raise short term rates back to normal levels because the economy is growing, investors would gain confidence in the future and increase spending.

Professor King’s comments highlighted the importance of melding economic theory with consumer behavior, which is often influenced by emotions.

LONG TERM INVESTORS SHOULD FOCUS ON THE LONG TERM

Since last Friday, there have been a number of up and down days in the stock and bond markets. Some of that volatility has been attributed to changing views on whether the U.S. Federal Reserve will increase short term interest rates this month.

Trying to profit from guessing at what the Fed will do is speculation, not investing.

The timing of a change in short term rates is uncertain, as is the impact on financial markets. Interest rates for intermediate and long term bonds may increase. U.S. stock prices may appreciate if investors perceive the increase as a positive signal that the economy is growing. It is also conceivable that stock markets will fall as higher interest rates increase the attractiveness of bonds and cash.

In uncertain times, long term investors benefit by continuing to match their investment strategy to their long term financial goals.