Because I am a saver, not a borrower, I am not a big fan of our current super-low interest rates, especially in safe investments like Treasuries, money market accounts and bank CDs. So I have been hoping to see some end to this low-rate tunnel, which in theory was going to come in mid 2012.
But no … as you can see from this Associated Press report today:
The Federal Reserve went further than ever Wednesday to assure consumers and businesses that they’ll be able to borrow cheaply well into the future.
The Fed pushed back the date for any likely increase in its benchmark interest rate by at least a year and a half, until late 2014 at the earliest.
What this means. Obviously, the Fed is very worried about the world economy, especially with warnings this week from the IMF about Europe’s dismal condition. So the Fed is promising (practically) that it will hold short-term rates near zero for 2+ more years. The stock market, in the short term, is going to like this, because when investors have no other options for inflation-beating returns, the stock market looks very attractive. And right now Treasuries – including Treasury Inflation Protected Securities up to 10 years – aren’t offering inflation-beating returns. And we saw the stock market rise today after the Fed announcement.
For TIPS you already own. Your past investments look rock solid. I’m still not a fan of over-bought TIPS ETFs and mutual funds, but you can see the Fed gave owners a nice present today:
For TIPS buyers in the near future: The news is not so good. We can expect these super-low rates to continue. When a TIPS is paying a real return below zero or near zero, TIPS are not an attractive long-term investment, in my opinion. We possibly face many more months of these sub-par, and unattractive, returns.
The Fed is trying to force you to look to the stock market, especially dividend-paying stocks. That might be a good option, but there is risk. And the stock market has had a very nice run.
Joe Bel Bruno of the Los Angeles Times summed this up nicely today: Savers are getting screwed. Those are my words. not his. Here is his succinct summary:
The Fed’s latest maneuvering to resuscitate the ailing economy has already sent yields on government bonds — already hovering at generational lows — even lower. The yield on the benchmark 10-year sank to a measly 1.96% on Wednesday. Meanwhile, the amount of money you’re making on money markets or savings accounts continues to be microscopic. The average one-year CD yields is just 0.67% — down from 2.4% four years ago and 3.75% in 2007.
Forget the old adage about a penny saved being a penny earned. Borrowers win and savers lose in this environment.
And inflation in the future? I will refer you to one of my favorite bloggers, Michael Ashton (The Inflation Trader) and his post today:
Despite the obvious train wreck, investors are not fleeing into deflation insurance. Quite the contrary: since September, both spot and especially 5-year forward inflation expectations have been rising sharply. I think these investors have it right: … policymakers clearly will attempt to err on the side of higher prices rather than lower prices.
TIPS buy-and-holders – probably the most conservative investors on Earth – are left with this sad conclusion: Stomach horrible yields and hope for higher inflation.