The Days of Easy Income Are Over

Posted in: Economics, General, Stock Market, Thought of the Week

The Fed’s bond-buying program known as Quantitative Easing (QE), which has helped keep interest rates artificially low since 2008, will end in October. Our Investment Committee has referred to this as the “War on seniors and savers.” Income seekers who have either sat in cash for the last six years, or moved into risky assets in search of yield, are increasingly anxious for the Fed to begin raising interest rates in hope of returning to the days where interest earned on CDs and money market funds could be used to pay bills. Unfortunately, our Investment Committee believes we are a decade or more away from returning to those days.

The last time interest rates were near zero was back during the Great Depression. Back then, interest rates stayed down at zero for close to sixteen years because the Fed raised interest rates very slowly and methodically for fear of causing the economy to fall back into a depression. Additionally, it took thirty years for interest on cash to reach the long-term average of 3.7%. Given the severity of the Great Recession in 2008, our Investment Committee firmly believes that the Fed will repeat this behavior for fear of moving too fast, thus causing income seekers to endure an even longer period of zero returns on cash.

The days of buying these ultra-safe assets to pay the bills are over for the foreseeable future. In other words, the timing of the Fed’s first interest rate hike is almost irrelevant. The good news is that income is out there, and our Investment Committee is finding attractive risk-adjusted income on a regular basis. The strategies used by risk-averse investors to pay bills a decade ago can no longer work in the complexity of markets today. For those who rely on income from investments to pay bills, the need for active management has never been higher. Investors must find professionals who are skilled at generating attractive risk-adjusted income, because even if the Fed were to raise rates tomorrow, we are likely a decade or more away from any material change in the rate offered on bank CDs and money market funds.

Read this week’s Thought of the Week to learn more about the ending of QE in October.

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As an Investment Advisory Representative working in conjunction with Global Financial Private Capital (GFPC) we are provided weekly thoughts on what is happening in the economy and the market. Written by our investment committee at GFPC we find these thoughts to be informative and interesting.