Charles Schwab, founder of one of the nation’s great brokerage firms, laid out his case today in the Wall Street Journal that the Federal Reserve, by holding interest rates near zero and committing to this policy for years to come, is damaging the U.S. economy and harming the nation’s savers by forcing them into riskier investments.
Thank you, thank you, thank you, Charles Schwab!
I have been seeing more and more of this sort of commentary. On the one hand, employment is gradually improving and GDP growth is holding around 2%. The stock market is rising nicely. And yet the Fed is determined to hold interest rates down, well below the rate of inflation, which Schwab rightly calls “central government manipulation of the free-market system.”
Schwab makes some excellent points:
Savers are being crushed.
“Average American savers and investors in or near retirement are being forced by the Fed’s zero-rate policy to take greater investment risks. To get even modest interest or earnings on their savings, they move out of safer assets such as money markets, short-term bonds or CDs and into riskier assets such as stocks. Either that or they tie up their assets in longer-term bonds that will backfire on them if inflation returns. They’re also dramatically scaling back their consumer spending and living more modestly, thus taking money out of the economy that would otherwise support growth. “
Fed policy sends the world into alarm.
“… the Fed’s actions, rather than helping, are having the perverse effect of destroying the confidence of businesses and individuals to invest and the willingness of banks to loan to anyone but those whose credit is so strong they don’t need loans. … To any potential borrower, the Fed’s policy is saying, in effect, the economy is still in critical condition, if not on its deathbed. You can’t keep a patient on life support and expect people to believe he’s gotten better.”
The Fed has no confidence in free markets.
“… the economy doesn’t need life support. Just the opposite. The patient needs to get up and start moving. We could get out of this mess, if only the Fed believed in the free-market system.”
What this means for TIPS. There is a new issue of a 30-year TIPS coming up this month, on Thursday, Feb. 16. That TIPS will likely auction with a base interest rate around 0.6%. While that would be a nice rate on a 5-year TIPS, it is ridiculously low for a 30-year TIPS. This is the result of the Fed’s assault on U.S. interest rates, and savers around the world.
I will just point out that one year ago, the Treasury auctioned a new 30-year TIPS, and it went off with a yield to maturity of 2.125%. And this was at a time of Federal Reserve easing! This same TIPS reissued in June at 1.744%. And now … 0.6%?
Thank you, Charles Schwab, for laying out the case that Treasury investors need to hear: The Federal Reserve is stealing from you.
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Agreed on all fronts. So I’m curious what your strategy is? Do we just forgo TIPs investing for a while until yields come back up? Obviously I’ve tapped out I Bonds, but I’m trying to construct a nice TIPS ladder here and the FED is not cooperating. Will you be a buyer at .6%??
Drew, I probably won’t be a buyer at 0.6% for a 30-year, but it is tempting, just because you would be locking in a real yield for 30 years. If you are committed to creating a TIPS ladder, and not investing a huge sum each time, this issue is a possibility. In recent new issues, the auction yield has ended up being better than expected, and that could happen again next week. Let’s hope.
Tipswatch — thanks!