First take: Time to think about the Fed

The strong September jobs report means that investors should be looking for the Federal Reserve to start nudging interest rates higher by mid-2015 — which could warrant caution in both stocks and bonds in the short term.

Make no mistake: This was a good report for U.S. workers. The U.S. added 248,000 jobs in September, far above the consensus estimate of 215,000. The report raised its figures for July and August as well, indicating that the economy is growing, easing the fears caused by August's initial report.

"This is a sigh-of-relief jobs report," says Ben Casselman, chief economics writer for fivethirtyeight.com. "The jobs recovery is still on track."

As employment rises, the odds that the Federal Reserve will start to raise short-term interest rates — currently at or near zero — rises as well. The Fed has a dual mandate: To keep the economy humming, and to prevent inflation.

USATODAY

Employers added 248,000 jobs in September

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The current numbers don't indicate inflation -- yet. To get a wage-price spiral, you need rising wages, and average hourly earnings actually fell 1 cent per hour, to $24.53 for all nonfarm workers. The number of discouraged workers -- those who have given up looking for work -- has fallen by 154,000 from a year earlier, to 698,000, which is still historically high.

If the trend continues, however, pressure will increase on the Fed to raise short-term rates. For investors, this means three things:

• Bonds. Bond yields generally depend on the bond market, and after this month, the Fed's bond-buying program will end. All things being equal, a growing economy and demand for loans should put upwards pressure on rates. Rising rates mean lower bond prices, and at current low yields, your interest payments won't fully offset the price declines. If you're considering buying a bond fund, you'll probably be able to buy more cheaply later.

• Stocks. The stock market thrives on good economic news, because as more people become employed, they have more money to spend — which should increase revenues and earnings. But Wall Street usually acts badly in the short-term when interest rates rise, so you should expect more volatility as the market anticipates the Fed's moves. Bear in mind, however, that the Fed's rate increases will be aimed at getting interest rates to normal levels from unusually low levels. Barring a burst of inflation, the Fed will not be trying to slow the economy.

• Savings. When the Fed moves, savers will finally get a small bit of interest from bank CDs and money market mutual funds. But they still won't get more than the rate of inflation, currently 1.7%