Low rates have created quite a dilemma for those with cash stakes who are suddenly at a loss for how to make a reasonable return on their money. This is becoming an even bigger problem as inflation begins to heat up. With cash earning 0%, it won’t take long until investors lose lots of purchasing power…READ MORE.
My Take: While I understand the rational for low rates in these difficult economic times, I worry about the unattended consequences. Saying we’ll do X in order to cause Y to happen is pretty straight forward, but what is changing because we’re doing X and causing Y to occur? As Milton Friedman once stated, “There’s no free lunch.”
Low interest rates are great for many people/businesses, but they are also a burden for others. If you’re a retired person attempting to structure your portfolio to meet a certain fixed income level, the job now is more difficult than ever. With rock-bottom rates being given to savings, money-market and CD accounts, you almost have no choice but to increase your portfolio’s risk to obtain the return you need to get by.
Younger people might not think about the difficulties of these rates on those retired because they’re not dealing with an equivalent situation. The problem of receiving little reward for putting your money away in FDIC secured accounts is a real one. It’s going to become even more real, if we see a growing amount of inflation throughout the economy. Not only will savers not be rewarded through higher savings rate, but they will be penalized by an increasing rate of inflation.
If savers turn to the market to get their interest rate/dividend yield fix, what happens if the market stumbles? Maybe it won’t happen, but if it does, it’s not going to be pretty for a lot of people that are indirectly being forced into investments that carry varying degrees of risk.
As more of the baby-boomers become retirees, a greater need will be placed on investments that can provide for a monthly or quarterly income payment. If interest rates are kept down by the Fed, retirees will continue to be forced to take more risk than what they had planned to take in order to earn a level of return necessary to maintain their standard of living. Artificially low rates do not provide a free lunch.