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Low Interest Rates until 2014!
Old 01-28-2012, 06:38 AM   #1
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Low Interest Rates until 2014!

I don't understand the policy of ultra-low interest rates, especially in a time of significant inflation (3.5% last year). But it is something we have to deal with. Florida has a lot of retired people. Has the ulta-low interest rate environment been an issue there? Not that I know of. I wonder if this will backfire soon when people realize they are giving up billions of dollars in interest every year. Time will tell.
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Lump Sum
Old 01-28-2012, 06:56 AM   #2
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Lump Sum

I think they have painted themselves in a corner. Raising interest rates would have a significant factor on the budget due to financng the debt. They'll kick the can until they can't.

On a personal note this helps with my ER date flexibility because I'm planning on a lump sum distribution which is based on current interest rates. While the rates are low the lump sum is bigger. I was worried that raising rates would drive me to leave mega-corp earlier then preferred. I'm now eligible in Oct12, targeting Mar13 with the window extending to Mar14.
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Old 01-28-2012, 09:19 AM   #3
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My biggest fear is inflation or stagflation. I won't get a cola on my pension until I am 62, that is my biggest risk in retiring at age 56 in 2013. If we hit the high inflation years like we did in the 70's, my pension will be toast.
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Old 01-28-2012, 10:48 AM   #4
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This hurts the pension funds also and their income related investments.
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Old 01-28-2012, 11:00 AM   #5
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This hurts the pension funds also and their income related investments.
It really hurts anything that relies on a decent long term return on their assets. Not only pension plans, but also insurance -- forcing premium hikes without increasing coverage.

Many said the Fed's War on Savers is "inflationary" but few really considered inflation from this angle.
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Old 01-28-2012, 11:05 AM   #6
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On a personal note this helps with my ER date flexibility because I'm planning on a lump sum distribution which is based on current interest rates. While the rates are low the lump sum is bigger. I was worried that raising rates would drive me to leave mega-corp earlier then preferred. I'm now eligible in Oct12, targeting Mar13 with the window extending to Mar14.
Thanks Tekward. You have reminded us that these policy decisions have winners and losers. I am glad you will benefit from this. May your lump sum be be big and multiply.
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Old 01-28-2012, 11:09 AM   #7
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So you`re saying insurance companies rely on interest bearing accounts to keep their premiums lower? I`ll have to throw that one by my insurance agent.
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Old 01-28-2012, 11:31 AM   #8
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So you`re saying insurance companies rely on interest bearing accounts to keep their premiums lower? I`ll have to throw that one by my insurance agent.
Some of it is in bonds, yes -- and as the Fed continues to punish savers, dropping yields across the board, lower interest rates do impact the return they get on their "float" -- premiums collected but not yet paid out in claims, which they have to invest somewhere.

And when their return on "float" drops enough, they have to find other ways to remain profitable, usually in the form of rate hikes.
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"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

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Old 01-28-2012, 11:40 AM   #9
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So you`re saying insurance companies rely on interest bearing accounts to keep their premiums lower? I`ll have to throw that one by my insurance agent.
Insurance companies, especially those that insure longer term risks such as life, need to project the future benefits they will be paying out and fully fund those liabilities now, and they must use "safe" investments to fund them. Typically US Treasury bonds with some high quality corporate fixed income. If the future value of the payout rises faster than the interest rate the insurance fund is getting, the difference will be made up with rate increases.

The same problem, BTW, faces pension funds. They too need to estimate future benefits and fund them today, and a large part of their funding must also be in assets that have a low risk of loss. Again, Treasuries. As interest rates fall the portion that is deemed funded falls and the risk grows that the pension fund will be unable to meet its obligations.
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Old 01-28-2012, 05:37 PM   #10
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Some of it is in bonds, yes -- and as the Fed continues to punish savers, dropping yields across the board, lower interest rates do impact the return they get on their "float" -- premiums collected but not yet paid out in claims, which they have to invest somewhere.

And when their return on "float" drops enough, they have to find other ways to remain profitable, usually in the form of rate hikes.
I happened to watch most of Bernacke's press conference following the announcement. He did get a question on the war on savers, sadly the question was in the context of the Republican nomination. So Bernacke smartly ducked the political question, and addressed the war on saver pretty simply. (paraphrasing) "Yes the low interest rates hurt savers, but in the long run the thing that will help both savers and investors the most is robust American economy." It is hard to disagree with his answer but...

The question that I wish somebody would ask the Fed is this. "Are you worried that continued long term low interest rates may have a perverse impact on the economy by discouraging more consumption and investment in risky assets, while encourage more savings, since consumer see that they will need to save even more for retirement and retirees see they need to cut back on consumption"

Now I personally have responded to Fed's actions in exactly the way they want. My AA has shifted from 25-30% cash/bonds to 15-20%. I also made and continue to investigate making investments in real estate in hard hit areas, Vegas, and the Inland Empire something which would have been unthinkable 5 years ago.

However, I suspect that I am in the minority most people on the board I think are maintaining the same AA that had before the crisis or perhaps even cutting back on stocks. Somebody looking to retire in 5 to 10 years and looks at annuities available from insurance companies is probably going to be incentivized to save even more, but is still probably gunshy of the stock market. More broadly the American public who have only the foggiest concept of AA, have been pouring money into bond funds.

The announcement that rates will remain low for several year has made short bond funds less risky and I may even move some of my cash into them.
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Old 01-28-2012, 06:02 PM   #11
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The question that I wish somebody would ask the Fed is this. "Are you worried that continued long term low interest rates may have a perverse impact on the economy by discouraging more consumption and investment in risky assets, while encourage more savings, since consumer see that they will need to save even more for retirement and retirees see they need to cut back on consumption"
Another thing I'd say is this -- it's said that among other things, low interest rates are being used to encourage home buying to put a "floor" on housing prices by keeping mortgage rates very low and payments much more affordable.

But how does it help the housing market when Bernanke effectively tells people thinking about buying a home, "No rush to buy, folks -- you'll still have this window of opportunity for 3 more years."
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"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
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Old 01-28-2012, 07:37 PM   #12
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Another thing I'd say is this -- it's said that among other things, low interest rates are being used to encourage home buying to put a "floor" on housing prices by keeping mortgage rates very low and payments much more affordable.

But how does it help the housing market when Bernanke effectively tells people thinking about buying a home, "No rush to buy, folks -- you'll still have this window of opportunity for 3 more years."
Cutting the low rates short wouldn't speed up the housing slide to the bottom.

The tax rebates for home buying gave a slight bump, but then the slide continued down afterward. There just aren't enough available buyers to suck up the available homes.

The interest rates being low are helping keep prices up, but once the rates go up, prices will drop even more.

Even if you set a deadline of, say, six months or a year on low rates, the ones who are able to buy based on needing a down payment and decent credit score already are.

I'm of the opinion that we should just bite the bullet, rather than kick the can down the road (if you'll excuse me mixing my metaphors), but by keeping rates low it gives several years for buyers to get short sales off their record and repurchase at affordable rates and prices.

I don't think that many are sitting on the sidelines waiting to purchase simply because the rates will be low for awhile. "Oh hey, rates are low now, but let's wait until they're going up!"

Like I said, I think we should just let it crash to the bottom so recovery can start. But keeping rates low to keep them affordable isn't as crazy as your scenario presents it, IMO.
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Old 01-28-2012, 09:43 PM   #13
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lots of monetary expansion + low demand for funds = low rates

the graphs at the following link show how dramatically central banks around the world have been expanding their balance sheets during recent years

http://www.ritholtz.com/blog/2012/01...in-a-qe-world/
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