Despite taking no action at its policy meeting that ended Wednesday, the Federal Reserve has been dropping hints that an interest rate increase is on the table, and that, says Pittsburgh financial adviser Robert Fragasso, highlights the fact that — despite a reputation as a safe-haven investment — bonds are not without risk.

“Bonds can go down in value. People mistakenly think they are guaranteed. Well, they are guaranteed, but only on the day they mature,” said Mr. Fragasso, CEO of Fragasso Financial Advisors, Downtown.

“In the meantime, you’ve got great fluctuations in value. If interest rates go up, bond values go down.”

The Federal Open Market Committee ended its two-day meeting Wednesday in Jackson Hole, Wyo., making no definite announcement on when it will commence its rate-raising cycle. The Central Bank’s policy statement pointed to weakness in the labor market and overall economy, raising speculation that it will not be ready to raise rates until at least September.

The Commerce Department reported Wednesday that the U.S. economy grew by just 0.2 percent in the first quarter, well below the 1 percent growth economists had predicted, and a far cry from the 2.2 percent expansion posted in the fourth quarter.

The Federal Reserve first lowered its key federal funds rate to near zero in December 2008 in an effort to stimulate the sluggish economy. Six years later, the Fed has begun setting target dates for when the rate will rise, but weak economic data have led officials to reconsider the start date several times.

The Federal Reserve does not control interest rates on bank CDs and bonds. But when the Fed raises its federal funds rate — the interest rate that banks pay to borrow money from each other overnight — it causes the entire yield curve to go up in the credit markets.

That means new bonds are priced at a higher yield and previously owned bonds are worth less. The most vulnerable of all bonds in a rising rate scenario is the 30-year bond.

Mr. Fragasso, whose firm manages or provides services for $1.2 billion in assets, said his firm is managing risk by avoiding long-term bonds altogether, since they are most severely affected by rising interest rates. He recommends short-term bonds of one year or less, or intermediate bonds of five years or less.

“I’m not predicting high interest rates,” he said. “We may not see high interest rates for years. But we will see higher rates, and that’s all we need to see to hurt the value of bonds.”

He said that doesn’t mean investors shouldn’t have bonds. “But you have to understand the risks involved in owning bonds right now.”

Laura LaRosa, director of portfolio management at Glenmede, a Philadelphia-based money manager with $30 billion in assets under management, said a Fed rate increase will happen “later rather than sooner.”

“June is off of the table. September, while a possibility, is looking less likely with whispers of the Fed pushing interest rate increases out toward the end of the year. The Fed is trying to give as much guidance as possible without being explicit.

“The more uncertainty around when rates will rise, the more volatile the markets tend to be,” Ms. LaRosa said. “The current uncertainty, even with the Fed’s guidance, results in volatility that we believe will continue throughout the rest of the year.”

Stocks dropped Wednesday on the economic news and stayed lower after the Fed announcement. The Dow Jones industrial average fell 74 points, or 0.4 percent, to close at 18,035. The Standard & Poor’s 500 index fell 7 points, or 0.4 percent, to 2,106. The Nasdaq fell 31 points, or 0.6 percent, to 5,023.

In light of the low yields being paid on fixed-income investments such as bonds and bank CDs, Mr. Fragasso suggests that investors are, for the time being at least, better off investing in stocks.

“Investors are knowingly and unknowingly striving for higher yield and thus taking more risk than they should take to do that,” he said. “There’s an answer to it. And that is don’t just depend on yield from bonds and fixed income investments. Have a balanced portfolio of bonds and stocks. You can spend gains [from stocks] just as easily as you can spend income [from bonds].”

Tim Grant: tgrant@post-gazette.com or 412-263-1591.

First Published: April 30, 2015, 4:00 a.m.