Don’t forget to check out Part 2 and find out How to Profit from Low Interest Rates
In the university course I’m teaching, the Investments text was published in 2010. The examples in the book use 12% as an expected return on stock investments and Treasury bill rates are projected at upwards of 5%. Compare those returns with the recent 1.24% 5 year average return on the Vanguard Total Stock Market Index Fund (VTSMX) and the 3.55% iShares Barclays 1-3 Year Treasury Bond Exchange Traded Fund (SHY) annualized 5 year yield.
The students in my class complained about the unrealistic examples in the text book. They have no experience with actually receiving a few percent interest on their bank savings accounts and 5% CD rates.
What is Going on with Low Interest Rates?
In economic terms, the Federal Reserve Bank which decides monetary policy is trying to pull our economy out of a recession and jump start growth. As part of this effort, the low interest rates are designed to promote spending by consumers and corporations. Firms fund growth through expansion and frequently take on debt to finance that growth. With low interest rates, corporate borrowing costs are rock bottom. This allows those corporations to expand at a cheaper cost than in a high interest rate environment.
Consumers make decisions whether to spend or save based on many factors. Included in that decision making are returns on saving. With low interest rates on savings, the government would like to see consumers spending in lieu of saving in order to help grow the economy. Actually, consumer spending is about 70% of Gross Domestic Product, the main metric to gauge the economic health of the country.
Savers and Retirees are Hurt by Low Interest Rates
The consequences for savers, especially retirees are difficult. Today, retirees are panicked as their CD income is nonexistent. My relatives with only cash investments have gone from high returns on their savings to retirement cash nibbled up by inflation. For the population past their earning years, hoping to supplement their social security income with interest from bank Certificates of Deposit, it is a dire financial time.
Ben Bernanke, the Chairman of the Federal Reserve Bank and one of the most powerful people in the U.S., pledged to keep interest rates low until 2014. That’s almost two more years. It is rare to have that type of clarity on the future of interest rates. In fact, I’ve never heard an official make such a public comment about upcoming monetary policy. Usually the Fed’s actions are hush hush and a complete surprise.
In the next article in this series, you’ll get some ideas about how to profit from the current interest rate environment. It is certain that it won’t last forever, yet instead of waiting for rates to rise and interest payments to grow, there are some tactics to boost your returns now.
In the Part 2, learn Three Ways to Profit in the Current Interest Rate Environment.
Related Reading for Those Who Can’t Get Enough
How Bonds are Valued and React to Interest Rate Changes at Moolanomy
Investing to Beat Inflation at Money is the Root
Low Savings Interest Rates; Good or Bad? Consumerism Commentary
Is the Fed Putting Your Retirement Savings at Risk? A guest article by Nerdwallet.com at One Money Design
How have the low interest rates affected your behavior?
