Mark your calendars. Tomorrow, Sept. 21 at 2 p.m. Eastern, is when the Federal Open Market Committee will announce whether or not it will raise interest rates. This, as my colleague Jared Levy points out, is an event that could easily turn this market on its head. 

If the Fed takes a dovish outlook and chooses to not raise rates, then it could fuel another short-term rally (at the expense of risking higher inflation down the road). Jared recently pointed out to his Profit Amplifier readers that this seems to be what the consensus is expecting; both Bloomberg and Goldman Sachs believe there’s only a 25% chance we’ll see a rate hike next week. (My money is still on a rate hike by the end of the year, though.)

Still, even though the odds are low this time around, a rate hike is still very much on the table. As many as six members of the 10-member committee have issued generally hawkish comments on the public record. So it’s just a matter of “when,” not “if.” And when the Fed does raise rates, then expect the news to trigger massive selling and a general reversal in market sentiment. 

Personally, Jared believes we may actually see a rate increase next Wednesday as part of “an effort to peel off the Band-Aid”. He notes that a hike would demonstrate that the group isn’t acting at the behest of traders or Washington, and that the economy is truly healing. 

#-ad_banner-#The decision on whether or not to raise rates (and when) is going to have bad consequences either way. We can’t control that. But what we can control is how we react to the situation.

The Fed’s No-Win Scenario
While considering what to do about this no-win scenario, I was reminded of a Bloomberg piece I came across recently about the Federal Reserve’s conundrum. 

In the article, RBC analyst Matthew Barasch compares Fed Chairwoman Janet Yellen’s choice on whether or not to raise interest rates (and when) to the famous no-win training scenario (dubbed the Kobayashi Maru) used on cadets in the fictional Star Trek universe. 

“In Star Trek, top cadets at Starfleet Academy face a terrible training scenario: Do they abandon a civilian vessel to annihilation in the Neutral Zone or risk war with the Klingons — and their own demise — by embarking upon a rescue mission?

In her quest to save the U.S. economy from deflation, Federal Reserve Chair Janet Yellen faces a similar challenge to that faced by then-cadet James T. Kirk, according to RBC Dominion Securities Inc. Strategist Matthew Barasch.

Yellen can elect to head into the Neutral Zone — that is, deliver more rate hikes — supported by a variety of modified Taylor Rule models that suggest policy rates should be higher. Doing so would risk damaging emerging market economies, including China, and cementing deflationary forces around the globe.

Conversely, she can leave her Kobayashi Maru (the phantom ship in Star Trek lore) to its fate, foregoing hikes in light of sluggish economic activity. But that strategy risks having inflation rise above the central bank’s 2 percent target. If that were to happen, a series of rapid rate hikes to tamp it down could send the U.S. economy into recession.”

Barasch argues that it’s hard to know the correct answer here. He’s right. I know what I would do, but I’m not in the captain’s chair. Besides, that’s not the point. In the no-win scenario facing the Fed, it’s all about how you deal with it that will determine your success as an investor.

Here’s what I mean… 

For those of you who may not be familiar with the example cited by the RBC analyst above, the point of the Kobayashi Maru simulation in Star Trek was to see how cadets would react to and deal with the consequences of no-win scenarios that might present themselves in real life. 

The simulation was technically beaten, however, — but only once — by none other than a young James T. Kirk. But in order to win, he had to “cheat” by reprogramming the simulation, famously saying that he didn’t believe in no-win situations. By rewriting the rules (or some would say, by cheating), he took his fate into his own hands. And rather than expelling him, Starfleet Academy awarded him with a commendation for his attitude and original thinking. This sort of brash, can’t-lose approach would, of course, go on to serve him well as captain of the famous USS Enterprise.

Investors would be well served by taking this approach with their own portfolio. And while the stakes with the Fed’s decision aren’t as high as life or death, they are certainly not fictitious either. What you choose to do as an investor as a result could make or break your portfolio. 

What the Fed Might Do — And How You Can Take Charge
Thankfully, Jared has a prescription for that, which he recently shared with his Profit Amplifier readers.

“As I said before, it’s impossible to know for certain what will happen.

It’s my job to help you make money. But at the same time, it’s equally important to control risk. 

As you can see, the market is facing a complex situation that is growing more tenuous by the day. Outcomes are unpredictable, and I don’t believe we can safely trade in this environment. Forcing a trade is never a prudent move.

Until we have a definitive ruling from Yellen and company, I find it hard to make a recommendation that satisfies both my mandates.”

The good news is that Jared and his readers have been on the right side of several trades recently (including another winner that closed on Tuesday — a 16.5% gain on Apple in two weeks). Not only that, but they have managed to beat volatility at its own game. Given this success, and in an effort to protect profits, Jared says the sideline is the best place to be for the next few trading days.

Keep in mind, this is not a call to sell everything and go to cash. But it is a call for profit-taking and caution. If you have any trades in play that you would consider to be on the risky end of the spectrum, then you may want to consider pulling out. For other bedrock positions that you have more faith in, monitor them closely. If and when a rate hike does happen, be prepared to react in a calm, calculating manor. That means any general downturn is likely a chance to buy on the cheap.

Editor’s Note: If you’re looking for more guidance on the current market — especially if you’re looking to take more control of your portfolio — then you would probably stand to benefit from watching Jared’s latest presentation. In this six-minute training video, Jared reveals the “backdoor” the smartest traders on Wall Street use to earn 5-10 times more than the average investor makes. Best of all, this method allows you to profit whether stocks go up or down. To watch the training video, go here.