Weekly Newsletter   Challenge account   Weekly Newsletter   

Slowing Job Growth, Low Inflation Make Likelihood for Rate Hike Doubtful

Fed Chair Janet Yellen may not think the time is right to raise interest rates, but many retirees and other savers, would beg to differ. They say the time is right, and that it has been right for years.

The low interest rate environment has impacted these groups perhaps more than any other. Those who’ve saved using traditional types of vehicles, such as a CDs or savings accounts, can be the equivalent of putting their money under the mattress because the amount of return on saving through such vehicles is so low.

While Yellen frets over the overall health of the economy in determining when it will be healthy enough to sustain a rate hike, savers have some savings instruments they can use to increase their returns.

Before we get into those vehicles, let’s review some of the factors that have led to this low interest rate environment.

 · Semi-annual testimonial

This week, Yellen was on Capitol Hill to update lawmakers on a wide array of financial issues. She explained that while the economy showed signs of improvement, such as an improved unemployment rate. Still she remained cautious because hiring was slowing.

She told members of the Senate Banking Committee that there were a number of different metrics over the last several months that suggest a loss of momentum in terms of the pace of improvement.

“We believe that will turn around, we expect it to turn around, but we are taking a cautious approach and watching very carefully to make sure that that expectation is borne out before we proceed to raise interest rates further,” Yellen said.

One good thing for savers that came from Yellen’s talk was that the Fed would not implement a negative interest rate policy. However, she acknowledged that the Fed does have the authority to do so.

 · Chance of hike this year

There could be two hikes this year, according to Yellen. However, it looks like one would be most likely and would likely not occur until after the November elections.

An immediate headwind is Brexit, which is the possibility of Britain leaving the European Union. The vote is set for Thursday. If voters decide to leave the EU, it could cause turmoil in the markets. This is the last thing the economy needs, and it could lessen the chance of a rate increase.

Some speculate that the Fed could announce a rate hike in July when it meets. However, the market, and investors, has learned to not put much stake into the rumor mill when it comes to the Fed and interest rates. It was thought that the monetary policy was set to raise rates this month. All eyes were on the May jobs report as being the nudge the Fed needed to raise rates. However, it sorely disappointed. Only 33,000 jobs were created; at least 240,000 had been expected

 · So what a saver to do?

Instead of watching all of these metrics to determine when, and if, the dovish Fed will raise interest, savers should consider some of the following as ways to maximize their returns during this low interest rate environment.
– Dump the Government Bonds
Although government bonds have traditionally been great investments, that’s not the case in low interest rate environments. Instead, consider something like bond ladders. We told you most recently about this method in April. Bond ladder portfolios contain bonds with different maturities bonds and coupon payments. They can be reinvested according to the “rungs” that make up the ladder. For example, bonds that are reinvested in the longest rung of the ladder offer higher yields than those bonds that are reinvested in the shorter rungs.
– Stocks
Reallocate a portion of your income-oriented portfolio away from bonds and into stocks, according to Barrons. It states that a comparison of earnings and bond yields suggests that, at least on a relative basis, equities are still the better bargain. Seek out stocks from companies that offer dividends.
– Leveraged funds
Consider real estate investment trusts, or REITS, that invest in mortgage-backed securities. These REITs are popular because they are known for their high dividend yields.

Also consider leveraged closed-end funds. They can thrive in low interest rate environments. However, investors must be aware of the risks, so it is best to discuss this option with your financial advisor.

Leave a Reply

Your email address will not be published. Required fields are marked *