Last Thursday, everyone waited with baited breath as the Fed concluded their September meeting. The question of will they or won’t they raise interest rates as they had been telegraphing since the beginning of the year was answered: the can was once again kicked down the road. With the Fed declining to raise rates but still signaling that they believe a rate rise is imminent before the end of the year, the market was left with something it truly abhors, uncertainty, and we’ll be back in October (the Fed’s next meeting) again waiting with baited breath.
In addition to the negative reaction of the stock markets to the Fed’s decision to hold fast, there’s another group of people who also wish they would just go ahead and do as they say: savers. One effect of the low rate environment is that it has pushed traditionally conservative investors, namely retirees, to take more risk in search of yield. Below is a great little piece originally posted at marketplace.org that puts the rate debate in their perspective.
Update: The Federal Reserve announced Thursday it will keep its interest rate target near zero.
Whenever a long-awaited increase happens, it will make some folks very happy: savers.
People like 75-year-old Dianne Boyer. I caught up with her recently in the lobby of her building at a retirement community in Maryland. It’s 3:30 in the afternoon, and the lobby is buzzing. There’s an intense bridge game in one corner. Other people are waiting for dinner to start in the adjacent dining room. Boyer says sometimes the dinner conversation turns to interest rates — specifically, how the Fed’s low rates have clobbered people’s savings accounts and CDs.
“More people use mattresses than savings accounts," she says. "It’s the same interest rate!”
Boyer and her husband, Bill, have poured their savings into the stock market. Boyer says people who still have most of their money in the bank are worried they’ll outlast their nest eggs.
“They’re worried about whether they’ll continue their lifestyle, whether they’ll be able to leave anything — inheritance — to their kids,” she says.
Pension fund managers are waiting for higher rates, too. Many need to make 7 percent on their investments. But now it’s hard to make even 5 percent.
“Now there are no assets that return 5 percent that are safe," says Terry Burnham, a professor of finance at Chapman University. "They’re all super risky if you’re making 5 percent.”
There’s somebody else who will benefit from higher interest rates: Janet Yellen. The Fed will finally have the option to use rates as a lever, pushing them down to stimulate the economy. Right now, rates can’t go any lower because they’re near zero.
“The Fed has run out of bullets,” says Ted Peters, chairman and CEO of Bluestone Financial Institutions Fund, and a former member of the Philadelphia Federal Reserve Board. “If rates go back up it gives them some leverage to do some things down the road two or three years from now,” he says.
Peters thought the Fed would announce an interest rate increase Thursday, saying rates been too low for too long.