Federal Reserve: Let’s keep interest rates low until 2014

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:

One day TIP performance

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.



About Tipswatch

Author of Tipswatch.com blog, David Enna is a long-time journalist based in Charlotte, N.C. A past winner of two Society of American Business Editors and Writers awards, he has written on real estate and home finance, and was a founding editor of The Charlotte Observer's website.
This entry was posted in Investing in TIPS. Bookmark the permalink.

4 Responses to Federal Reserve: Let’s keep interest rates low until 2014

  1. tipswatch says:

    The TIP ETF today hit an all-time high of 119.06 mid-day and closed at 118.70, an all-time closing high. It opened Jan. 3 at 116.35, and so it has already gained 2.0% in 27 days, equivalent to the year-long yield of a 10-year Treasury.

    You can give thanks to Ben Bernanke and the Fed since as recently as Jan. 24, six days ago, TIP closed at 116.71.

    So the gain has been made. My problem is that I get uneasy when my investments hit one-year highs, get drastically nervous when they hit 5-year highs and go catatonic when they hit all time highs. Grrrr. I need to get over it.

    But every TIPS anyone has every purchased, at any time in the past, is worth more today than when they bought it. Nice.

    Will that continue? Not forever. But for right now, as you say, the Fed has locked in low rates for nearly three years. TIPS made an adjustment this week to that ever-expanding truth.

  2. Matt poskonka says:

    The price of the latest Tips (1-15-22) is up over 1.03. I did buy these even though the return was negative – but now my investment has increased. With the government stating that they will be buying treasuries in the future (again) what are your thoughts on the future price of these and all Tips?

  3. tipswatch says:

    Bill, I think your analysis makes a lot of sense — TIPS still aren’t a ‘horrible’ investment when the real return is below zero, especially when compared with nominal Treasuries and the run-of-the-mill bank CDs and money-market accounts. But they aren’t as attractive as I Bonds, since I Bonds will track inflation very closely and defer the taxes owed.

    The one way TIPS mutual funds and ETFs could lose is if the economy starts showing a sharp improvement. If that happens the real return is going to move upward and that will hit mutual funds. Buy-and-hold buyers of TIPS won’t feel much pain if they hold to maturity.

    My advice on TIPS is to use the buy and hold approach in Treasury Direct, and avoid holding a huge amount in mutual funds and ETFs. Many investors would disagree with me, though.

  4. Bill Marshall says:

    I’m a saver, and I’m worried about the world economy too. Either we’ll have high inflation, or deflation; I don’t see the current “muddle” continuing for more than six months or so. If we have inflation, TIPS will do fine, along with stocks/commodities, and CDs will do terrible. If we have deflation, TIPS will do fine, along with CDs, and stocks/commodities will do terrible (remember that TIPS will pay par at maturity, beating the negative inflation). It makes perfect sense to me that the real yield on TIPS has gone negative — its purely due to the high demand as the closest thing to a perfect hedge. TIPS only do badly while the muddle continues, which provides a fine time to accumulate a position.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s