How Long will Rates be Low?
How long can the Federal Reserve continue to keep US interest rates at record lows?
This is the million dollar question.
Potential home buyers are waiting to see if they can wait just a little longer to score a cheaper interest rate. The mortgage industry is loving all the refinances, especially now that some people have refinanced once or even twice at low interest rates compared to previous home loans.
Low Rates Until 2014
As it stands, it appears that the Federal Reserve will not relent on its policy to keep interest rates at record lows for at least one more year than planned. Previously, the low interest rate policy was intended to stick until 2013.
Now it seems like low interest rates are here to stay until 2014 – if not even longer! So what are investors to do now that rates are at record lows? Who knows!
It seems like everywhere you turn the economy is turning around in the United States. Home prices are staying flat, if not rising in some markets. The financial markets – especially equities – have been on a tear since the beginning of 2012. And Europe, once a key headline in every newspaper, finally looks like it has cooled down to the point where a solution may be found.
Forced Risk
Investors now face a market where they have to take on risk in order to get their expected returns. Cash investments yield a paltry 1% or even lower, with US savings rates unable to rise off their bottoms. Also, dividend paying stocks are being purchased up in masse by investors interested in beating the low benchmark interest rate.
We saw how stocks rallied after the Fed announced its low interest rate policy. This policy naturally benefits the people who consume and borrow the most, but what is it doing for everyone else? In particular, one has to worry about seniors’ ability to keep their retirement picture in check now that even $1 million won’t earn more than $30,000 per year in the longest-duration certificates of deposit.
In going forward, investors will have to accept more risk in their retirement portfolios if their own retirement picture is to work out as planned. It would be necessary for most everyone to start displacing more fixed income holdings like bonds and annuities with larger equity positions – a shift in the higher risk end of the investment spectrum.
How are you planning to deal with low interest rates? How much longer do you think rates can stay at record lows?
