Two more years of low rates means savers will continue to be punished
The Federal Reserve's latest policy meeting offered at least one surprise: a rare timeline for its current low interest-rate policy. After lowering short-term interest rates to virtually zero during the depths of the financial crisis in late 2008, the Fed announced Tuesday that it plans to keep them there for at least another two years. The reasoning behind the decision is that lower rates should encourage consumers to spend and businesses to increase lending, thus boosting the anemic economic growth rate. But there are clear winners and losers.
"There's a divide that makes this low interest-rate commitment by the Fed really positive or really negative, depending on which side you come down on," says Richard Barrington, a personal finance expert with Moneyrates.com. "Savers have largely been victimized by this environment, while borrowers have been the beneficiaries."
If you're primarily a saver -- in or nearing retirement, for example -- you'll continue to see paltry yields on investments like money market funds or certificates of deposit. Today, the average six-month CD yields just 0.41 percent, according to Moneyrates.com. (In comparison, in 2007, a six-month CD yielded more than 5 percent.) "People saving for retirement have to put more money aside because they will earn less interest on savings, and people already in retirement have seen their income levels drop to a fraction of what they were," Barrington says.
Add to that the effects of inflation. While many expect inflation to cool off somewhat as the economy slows, it has been trending higher lately. Over the past 12 months through June, the Consumer Price Index (CPI), which measures the average change in prices of goods and services over time, has increased 3.6 percent, according to the Bureau of Labor Statistics. The problem, says Greg McBride, senior financial analyst at Bankrate.com, is that inflation is a backward-looking statistic, while the yields you see on fixed-income securities today are forward-looking. "It's comparing what's behind us to what's ahead of us," he says. And looking forward, the future looks bleak for bond investors: Ten-year treasury bonds are only yielding 2.2 percent, the lowest level since early 2009.
So what's a saver to do?
Barrington says they have two options, neither of which are particularly appealing: save more or work longer. "People are going to have to get their minds around the concept of working longer," Barrington says. "If I work five more years, that's five more years of savings."
McBride says savers must stay diversified in this low-yield environment. "A well-diversified portfolio can produce income outside of just your cash and bond investments," he says. He recommends real estate investment trusts (REITs) and dividend-paying stocks of large, relatively stable U.S. companies. "Not only do they produce income, but they have yields that are a lot higher than what you're finding on your bonds and cash," McBride says.
He also suggests that fixed-income investors sell some of their bonds, which should have appreciated nicely over the past few months during the bond-market rally. Over the past three months, the Barclays U.S. Aggregate Bond Index has returned more than 3 percent. "Investors have the ability to rebalance back to their intended allocation by selling some of those appreciated bonds and using those proceeds to supplement the meager income they're receiving," McBride says.
On the other end of the spectrum are borrowers.
The Fed is hoping to light a fire under them by keeping rates low. "Mortgage rates are as low as they've ever been, and home prices have come down to the lowest levels in a decade in many markets," McBride says. Mortgage rates have fallen for the second consecutive week, with the benchmark conforming 30-year fixed mortgage rate now at 4.46 percent, according to Bankrate.com's weekly national survey. That's 0.04 percent from the record low reached in October and November 2010.
If you're in a position to refinance, now is a good time. Before the financial crisis, mortgage rates were a lot higher. The last time mortgage rates were above 6 percent -- a more normal level historically -- was November 2008, according to Bankrate.com. Back then, the average 30-year fixed rate was 6.33 percent. That means a $200,000 loan would have carried a monthly payment of $1,241.86. Today, the average monthly payment for the same loan would be $1,008.62.
By keeping rates low, the Fed is hoping to spur lending and borrowing to help resuscitate the dismal housing market. The problem, says Keith Gumbinger of HSH.com, is that a quarter of the real estate market is plagued by foreclosures, and the unemployment rate still hovers near 9 percent. Many borrowers simply can't qualify for a mortgage, he says.
While short-term interest rates are expected to remain low, mortgage rates won't necessarily stay near record lows, says Gumbinger. "The Fed doesn't specifically dictate what happens to mortgage rates," he says. "While they influence, certainly, where rates are in terms of monetary policy, if inflation or [economic] growth does begin to creep up, you'll see mortgage rates or other long-term interest rates begin to rise somewhat."
For more investing insight and money advice, visit iHaveNet's Wealth section
Available at Amazon.com: The Triumph of Value Investing: Smart Money Tactics for the Postrecession Era
- 4 Things Investors Can Learn From Fairholme Fund's Struggles
- What the Latest Fed Policy Means for Your Money
- Weathering Turbulent Markets with Prudence and Patience
- How Do You Preserve Purchasing Power in a Tumultuous Economy?
- Steve Jobs Steps Down as Apple CEO
- HTC Files Another Lawsuit Against Apple
- United-Continental to Deploy 11,000 iPads to Pilots
- Warren Buffett 'Impressed' with Bank of America, Invests $5 Billion
- United-Continental to Deploy 11,000 iPads to Pilots
- General Motors to Manufacture Plug-In Cadillac Hybrid Electric Car
- Google Will Pay $500 Million to Settle Illegal Canadian Pharmacy Ads
- Google Acquires Motorola Mobility in $12.5bn Deal
- HP Unveils New Desktop, Vows Continued PC Support
- IBM Unveils Cognitive Thinking Chips
- The Case For and Against a Stockless Portfolio
- 3 Sites for Picking the Right ETFs for You
- High-Yield Bond Investing Not For the Faint of Heart
- What Standard and Poor's Ratings Downgrade Means for Investors
- Why There's a Disconnect Between Stocks and the Economy
- Investors Have Their Heads in Cloud Computing
- Bank of America Still Has Potential for Rebound
- What Happened to the Muni Bond Blowup
- 5 Factors That Drive Stock Prices
- Health Care a Sound Investment Despite Slow Economy and Reform
- Home Depot: Home Improvement Mecca Struggles to Stay Steady
- Asset Classes for Yield-Hungry Investors
- Defensive Investing Lets You Take Risk With Peace of Mind
- Unusual Stock Funds Intriguing, Still Judged on Performance
- Modern Investors Idolize Financial Hall of Famers
- 6 Risks Every Investor Faces
- The Appeal of Emerging Markets Bonds
- Do Your Investments Love You Back?
- 3M: Resilient Maker of Post-It Notes Tapes Together Solid Growth
- 6 Investing Ideas for Today's Slow-Growth Economy
- The Most Successful Companies Stay Relevant
- When Asset Size Matters in Fund Investing
- Investing Intelligently Yet Cautiously Key for Rest of 2011
- 50 Best Funds for the Everyday Investor
- 2 Bright Spots in Europe: Denmark and Norway
- 5 Ominous Signs for Stock Investors
- Executive Pay Zooming Skyward Again
- Bank Stocks Slow to Show Recovery But Could Be Turning the Corner
- United Technologies: Conglomerate Relies on Cyclical Growth Factors
- International Paper Company Thinks Inside the Box
- Why Copper Is the Metal to Watch
- Auto Industry Weathers High Fuel Prices
- 6 Numbers Every Investor Should Follow
- ETFs Not Just For Riverboat Gamblers
- What Investors Can Learn From the VIX
- How to Find Value Stocks
- Learning From Madoff
- PIMCO's Bill Gross Wades Into Active ETFs
- The Smaller the Better: Investing in Micro-caps
- Confidence Remains Strong in Global Markets Despite Crises
- What Standard & Poor's U.S. Outlook Downgrade Means
- The Appeal of Go-Anywhere Funds
- Demand and Disasters Complicate Global Energy Picture
- Russia Stocks Soar on Rising Oil Prices
- Energy and Construction Stocks Looking Good -- For Now
- What Investors Can Learn From Fund Flows
- High-priced Stocks Worth the Money?
- Investors Continue to Chase Short-Term Performance
- 5 Reasons Investors Should Not Bail on Japan
- What Happens After Quantative Easing 2 Ends?
- A Closer Look at Restaurant Stocks
- Adobe Overcomes Obstacles to Continue Its Rise
- Where to Find the Dividends Now
- What Style of Index Investing Is Right for You?
- The Case for (and Against) European Stocks
- Tech Stocks Volatile But Undeniably Strong
- Find This Year's Investing Strategy in Last Year's Return
- Why Big U.S. Stocks Look Like a Good Bet
- Diversification: Can You Have Too Much of a Good Thing?
- 5 Tax Tips for Mutual Fund Investors
- What's the Best Way to Buy Bonds?
- Realities of New Retirement Changing Investment Strategies
- How Contango Affects Your Investments
- Best Intermediate-Term Bond Funds for the Long Term
- Elephant-Sized Mutual Funds Slow to Adapt But Steady
- What Next for Gold? Is Gold's Latest Selloff a Turning Point?
- eBay: Competition and Changing Trends Cloud Online Marketplace's Future
- What the Egyptian Uprising Means for Investors
- 'Latin American Decade' or Wishful Thinking?
- Emerging Markets: Proceed With Caution
- Best Large-Cap Blend Funds for the Long Term
- What Will QE2's Legacy Be?
- Hybrids, Electrics and Overseas Growth Pushing Ford Motor
- Muni Bond Market Safer Than You Think
- Is Now the Time to Buy Municipal Bonds?
- SEC Takes Steps Toward Financial Planning Overhaul, But Issues Remain
- How to Invest for Income
- Forget the BRICs: How to Invest in Emerging Markets
- Can REITs Continue to Rally in 2011?
- How to Invest in Rising Oil Prices
- Research Vital to Finding Right Target-Date Retirement Fund
- Consumer Staples Positioned Well for the Recovery
- Municipal Bonds: Trouble Brewing or Media Hype?
- Best Mid-Cap Blend Mutual Funds for the Long Term
- The Case for Active ETFs
- Cash Rich Companies to Watch in 2011
- Google's Growth Could Slow But Still a Solid Buy
- Growth Expected to Continue in Emerging Markets in 2011
- How to Navigate the Bond Market in 2011
- Five Ways to Introduce Youngsters to Stock Investing
- The Outlook for Value Investing
- Best Small-Cap Blend Funds for the Long Term
- 8 Investing Resolutions for 2011
- Growth Versus Value Investing in 2011
- Big Tobacco Leader Altria Holding Steady Despite Worries
- ETFs Capture Market Attention & Investment
- 5 Investment Themes for 2011
- How to Take Advantage of a Weak Dollar
- Best Foreign Large-Cap Blend Funds for the Long Term
- Fed Moves Boost Stock Returns
- Bond Funds Really Can Lose Money
- Teach Your Kid a Lesson in Investing
Investing - What the Latest Fed Policy Means for Your Money | Successful Investing
(c) 2011 TRIBUNE MEDIA SERVICES, INC.