FED policy maker says low rates to 2015

[rbmrtn]

Interview with Fed policy maker saying rates to stay low through 2015

Rates May Stay Low Through 2015: Fed's Williams - Yahoo! Finance

 

[ziggy29]

The War on Savers may never end.

 

[JOHNNIE36]

I am not a big financier but as I understand things going on, the local banks have no need to pay higher interest to savers (investors in CD's, etc) and then in turn lend money at a higher rate to borrowers. Why? Because they are borrowing money at rock bottom prices from the Federal Reserve. Why would those banks pay me 4% on a CD when they can get the money from the Fed for practically nothing. AND, then I think they are sitting on it, not lending and waiting for rates to go up so they lend it for an even larger profit. In the mean time, the savers, like retirees, are getting screwed because the banks aren't paying higher rates on CD's. What if I'm the Federal Reserve and I tell the banks, "you can borrow a $1 Million at 1% but you have to lend that $1 Million back out or you will get no more from us". There is something missing in the lending equation. What's the problem?

 

[M Paquette]

The War on Savers may never end.

Pining for the days of the 8% 1 year CD, FDIC insured? Good times, if you don't mind he 12% inflation that goes along with it.

 

[Animorph]

My long-term Treasurys are still doing nicely, pricewise.

 

[ziggy29]

Pining for the days of the 8% 1 year CD, FDIC insured? Good times, if you don't mind he 12% inflation that goes along with it.

Is that the only alternative? I seem to remember the early 2000s when we had moderate interest rates, relatively low inflation, with CDs and money market funds earning 4-5%.

Besides, in days you describe, you could have bought a 30-year Treasury and made out like a bandit in the long run. Can't do that here.

 

[samclem]

Interview with Fed policy maker saying rates to stay low through 2015

Rates May Stay Low Through 2015: Fed's Williams - Yahoo! Finance

Chairman Bernanke's term ends in Jan 2014, and there are indications he might not be renominated for the job. "Helicopter Ben's" departure might alter the outlook for continued low rates, if higher US and European inflation don't do the job before then. I wouldn't make a bet on long bonds right now.

 

[Texas Proud]

I am not a big financier but as I understand things going on, the local banks have no need to pay higher interest to savers (investors in CD's, etc) and then in turn lend money at a higher rate to borrowers. Why? Because they are borrowing money at rock bottom prices from the Federal Reserve. Why would those banks pay me 4% on a CD when they can get the money from the Fed for practically nothing. AND, then I think they are sitting on it, not lending and waiting for rates to go up so they lend it for an even larger profit. In the mean time, the savers, like retirees, are getting screwed because the banks aren't paying higher rates on CD's. What if I'm the Federal Reserve and I tell the banks, "you can borrow a $1 Million at 1% but you have to lend that $1 Million back out or you will get no more from us". There is something missing in the lending equation. What's the problem?

Banks do not borrow that much money from the Fed... how they influence the rates are the interbank lending rate... the rate that banks lend to each other...

Except for the last few years, as a bank you did NOT want to borrow money from the Fed... it meant nobody else would lend you money... it was a bad sign...

 

[NYEXPAT]

Interview with Fed policy maker saying rates to stay low through 2015

Rates May Stay Low Through 2015: Fed's Williams - Yahoo! Finance

I view it as a "net positive" for the Global Economy. Money always seeks the best return and money flows into developing economies for investment in factories and housing construction and infrastructure have had a tremendous effect on the quality of life for many people (myself included) while providing big returns for the investors.

Since 2004 Peru's economy has generated consistent GDP growth in the high single digits (except 1 year were growth was 1% when the recession hit most of the world) and halving the poverty rate, creating a "middle class" that is fueling consumption and the tripling/quadrupling of Real estate values.

Due to 60 billion in reserves (public debt at 6% of GDP) we are still managing to grow at +6% a year with 3% inflation even while European,US and Chinese demand is waning and Mineral prices are declining.

Savers here are able to get better than 5.5% on sovereign debt or up to 9.5% on CD's.

 

[Nords]

The War on Savers may never end.

Pining for the days of the 8% 1 year CD, FDIC insured? Good times, if you don't mind he 12% inflation that goes along with it.

There is something missing in the lending equation. What's the problem?

I'm still trying to figure out the problem with low inflation. So I'm losing 0.1% to it on my 1% CD instead of losing 2% to it on my 10% CD?

And low-yield Treasuries. Hey, China, want some more?

And, gosh, imagine if the only way to earn a return over inflation was to hold low-volatility dividend stocks for years or even decades...

 

[ziggy29]

I'm still trying to figure out the problem with low inflation. So I'm losing 0.1% to it on my 1% CD instead of losing 2% to it on my 10% CD?

And low-yield Treasuries. Hey, China, want some more?

Frankly, if I'm going to get returns on savings that are 2% below inflation, better to have a low inflation scenario because of the effect of taxes on interest income even when it doesn't even keep up with inflation.

Let's say you are in a 30% combined state and local tax bracket. With 10% inflation and an 8% yield on savings, for every $1,000 you get $80 in interest and lose $24 to taxes -- meaning after a year you have $1,056 when you now need $1,100 to maintain purchasing power. So you have fallen behind by $44.

But if you earn 1% interest with 3% inflation? That $1,000 gains $10 in interest, whereby you lose $3 to taxes. So you have $1,007 when you need $1,030 to maintain the same purchasing power. Instead of losing $44, you've only lost $23.

Just the same, not all economic environments produce "safe" yields that lose out to inflation. Yeah, the late 1970s and early 1980s did (because of grossly high inflation) and the 2008-present period does (because of pathetic yields on savings), but there have been plenty of times when savings yields kept up with (or beat) inflation. Not always after tax, but that's another issue for another time.

 

[foxfirev5]

I feel a huge pent up demand for any interest bearing instrument. I feel this will even further supress interest rates in the future. If interest rates do eventually increase then the dividend paying stocks will take a hit with profit taking and people moving to less risky investments.
Now that I've got that out of the way I plan to stick to my allocation and hopw for the best.
In the real old days people saved enough to retire and spent it down hopefully before they died. None of this fancy return on investment stuff.

 

[Tadpole]

I know exact why an old codger like my Dad might have gotten upset at interest rates if they live on cash flow. Let's exaggerate because I don't recall the numbers but I finally got his point. He took out a CD when inflation was high and interest rates were high too. Suppose his CD was $100,000 at 10%. So he received $10,000 to supplement his pension and SS. There was inflation but during the latter years of the CD it had subsided but his rate continued until the end. Let's say at the end it rolled over to 3%. Now he is getting $3,000 but the effect of all the inflation during the past years on his living expenses didn't go down $7,000.

That's why rate changes on fixed income are a little more complex than inflation.

 

[traineeinvestor]

I view it as a "net positive" for the Global Economy.

In the short term, I agree and would extend this to the domestic economy as well. The problem is that negative real interest rates encourage/allow some governments to keep borrowing very large amounts of money. At some stage, one would think that the cycle will turn and the interest expense will then be uncomfortably high.

In the meantime, it is certainly good news for borrowers like me - we fund our mortgages off a short term floating rate that currently costs around 1% pa (tax deductable). Long may it continue.

 

[Nords]

I know exact why an old codger like my Dad might have gotten upset at interest rates if they live on cash flow. Let's exaggerate because I don't recall the numbers but I finally got his point. He took out a CD when inflation was high and interest rates were high too. Suppose his CD was $100,000 at 10%. So he received $10,000 to supplement his pension and SS. There was inflation but during the latter years of the CD it had subsided but his rate continued until the end. Let's say at the end it rolled over to 3%. Now he is getting $3,000 but the effect of all the inflation during the past years on his living expenses didn't go down $7,000.

That 10% CD is exactly why his expenses went up so badly-- inflation was hammering the crap out of his budget while he was feeling the illusory wealth effect of $10K.

 

[Marc]

Low rates are fine; but what happens when treasury rates return to more historical norms of 5 or 6%? The debt service is going to kill us.

As I plan on annuitizing about a third of my portfolio upon retirement, I would like rates to at least rise a few points by 2016. Yes, inflation is low, but I would rather have a higher return on the annuity than bet that rates, and inflation, will stay low for 30+ years.

Marc

 

[samclem]

. . . I would rather have a higher return on the annuity than bet that rates, and inflation, will stay low for 30+ years.

If you buy an annuity that's exactly the bet you'll be making--that inflation will stay low.

 

[Marc]

If you buy an annuity that's exactly the bet you'll be making--that inflation will stay low.

No, I am betting inflation won't, on average, go higher. That is why I don't like the thought of buying an annuity at today's rates but I like the thought at higher rates. After all, I can lock in, even with a graduated annuity, a SWR much higher than 4% for that portion of my portfolio.

Marc

 

[MooreBonds]

That 10% CD is exactly why his expenses went up so badly-- inflation was hammering the crap out of his budget while he was feeling the illusory wealth effect of $10K.

But there is one thing to keep in mind: when your CD is paying out 10% while steak is going up at 10%/year, you can switch to chicken to save money, and b!tch&moan about it.....but when your CD is paying out 0.5% and chicken is going up at 5%/year, there's not much you can control, since even downgrading your choices/going without on the expense side will still far outstrip your income relative to previous years...the only hope is to take on a hugely greater amount of risk to try and bump up your income.

 

[traineeinvestor]

But there is one thing to keep in mind: when your CD is paying out 10% while steak is going up at 10%/year, you can switch to chicken to save money, and b!tch&moan about it.....but when your CD is paying out 0.5% and chicken is going up at 5%/year, there's not much you can control, since even downgrading your choices/going without on the expense side will still far outstrip your income relative to previous years...the only hope is to take on a hugely greater amount of risk to try and bump up your income.

There's always rice and beans. It might even be better for me.

 

[samclem]

No, I am betting inflation won't, on average, go higher. That is why I don't like the thought of buying an annuity at today's rates but I like the thought at higher rates. After all, I can lock in, even with a graduated annuity, a SWR much higher than 4% for that portion of my portfolio.

Marc

Yes, and "locking in" the rate is exactly what you'll be doing.
We've had some remarkably low inflation of late, it's not usually like this. And we have a huge gob of debt that will provide a powerful incentive in future years for the US government to foster inflation (so the debts can be paid off with dollars that are worth less).

There were many 30 year periods in the past when a "locked in" 5% rate wouldn't have worked out very well.

 

[obgyn65]

I just bought my first deferred annuity this year (as discussed in other threads) but did not take inflation into consideration -the annuity will have a 12% payout when I reach 62.

If you buy an annuity that's exactly the bet you'll be making--that inflation will stay low.

 

[samclem]

I just bought my first deferred annuity this year (as discussed in other threads) but did not take inflation into consideration -the annuity will have a 12% payout when I reach 62.

This might work out, or you might end up losing money to inflation (because of the way it's calculated and paid out, a direct comparison of an annuity's payout rate and inflation % isn't applicable). But I'm sure you purchased the annuity in order to have a guaranteed income stream, realizing that the income stream might be smaller than what you likely could have achieved through other investments, and that there's no guarantee it will keep pace with inflation. You pay for the guaranteed fixed income, and many people believe doing this is a good choice for their situation.

 

[rescueme]

If you buy an annuity that's exactly the bet you'll be making--that inflation will stay low.

Funny thing is that you can't time much - even annuities (specifically an SPIA).

We purchased ours in early-2007 with an IRR rate of just under 5% (no COLA).

Today, more than five years later? We look smart. Really, it was a short term bet on a long term instrument (life SPIA, purchased as "gap insurance" while delaying SS). Any remaining payments after that time are just icing on the cake for the rest of our lives, in our plan.

 

[Marc]

There were many 30 year periods in the past when a "locked in" 5% rate wouldn't have worked out very well.

Yes, and if treasuries go to 8% anytime in the next ten years, this country is going have to renege on so much debt that I won't be worrying that I made a somewhat bad debt on an immediate annuity. No matter inflation, we will not be able to grow our way to sustain 20,000,000,000,000 debt at 8%.

Marc