If you have a CD on deposit or just a savings account at a bank you likely have noticed you are not getting much in earned interest lately. I have a small CD at a credit union for a HSA I own and I am getting .90% for a five figure sum. Just a few years ago that was 4% plus. Frankly you are earning a negative interest rate, in that you are not getting paid enough savings interest to pay you a profit and keep up with the erosion of inflation to your principal. (Yes, I hold a CD, but only because I own a HSA that will only allow me to hold that in a savings vehicle without some serious fees.) What has happened to make savings rates so low?
Well what first happened is that the economy took a downturn and as loan demand fell off the cliff so did banks willingness to pay higher interest on money they can not lend. Many financial institutions now use their funds on account for buying short term treasury bonds, safe and secure, but also not much in return there either. The spread is thin, but at least it is some profit.
You are also seeing The Federal Reserve Bank at work here too. Bernanke and his friends on the Fed board are determined to keep rates low to keep the economy from going even lower and to keep interest on government borrowing to a minimum.
There is also another game afoot here as well. The Fed simply wants you to deploy your assets elsewhere, such as real estate, stocks, and business ventures. This in a effort to reinflate assets values in these lean times. The drop in values has caused serious problems in the economy. The drop in real estate values has hurt local governments who depend on property taxes for income. Real estate values has also made people who own homes think they have less money now with a home that is valued less than it was just a few years ago. The drop in stock values a couple of years ago did the same thing for people who own stocks. All these thoughts of being poorer made people less willing to spend money and consumer spending is the big driver of our economy.
Now to some extent The Fed has succeeded in their efforts. The Quantitative Easing model has pushed stock prices up a good bit since the March 2009 lows. The low rates on home loans has kept some people in the market buying. All this I suppose is good. But for me there is a problem here. Sooner or later The Fed has to stop using their massive power to hold down rates and allow the market to take over. There has to be some natural supply and demand here eventually. There really is a limit to how much The Fed itself can deploy in the exercise to control interest rates.
When that time comes I frankly have no idea what will happen. What I do see as most likely to happen is some uptick in rates. It simply can go no lower than it is now. So how do you take advantage of this situation right now? One, buy some real estate and grab these low rates for an extended loan. You will look back in just a few years and brag to others about your low home loan rate. I would also look into some good mutual funds that hold higher dividend stocks. You can also invest some of that extra money by adding to your 401-k plan at work. Stocks from companies that can raise prices when The Fed stops manipulating rates. Telecom companies like AT&T, Verizon, BCE. Real estate such as Healthcare REIT, Realty Income, National Retail Properties, and maybe an energy stock like Enerplus. Vanguard has some excellent mutual funds for just such investments. If choosing mutual funds consider adding to or starting a Roth IRA.
Full disclosure I own either as an option of long each stock and mutual funds listed above. Also am in the market for a home loan.
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