Don't Quit Your Day Job…

… isn’t always good for the individual investor.  For example, the S&P 500 has rallied back more than 400 points since March, but the Federal Lending Rate is somewhere between 0 and 0.25%.  The rate has all sorts of consequences for Main Street- it mostly affects short term rates.  In the carnage, even asset classes that were once expected to provide  a little more return have suffered- as of today, the average money market rate is a mere 1.07%.

Worse than Normal

The problems with the current Federal Reserve policy for savers are mostly unprecedented.  The Fed has its hands on so many levers it’s impossible to pinpoint exactly what’s responsible for low rates.  Fortune’s Allan Sloan takes a shot however – and very good one, at that.

Allan explains that recessions usually lead to short term interest rates, as the Federal Reserve has established a history of loose monetary policy during economic downturns.  In response to reduced spending, the Fed often cuts rates to encourage spending, a so-called ‘easy-money policy‘.  This recession is different.  The Federal Reserve is attempting to drive down other longer term rates, including mortgage rates and 10-year interest rates.  The result?  Low mortgage rates and low returns.  As Allan points out, money market mutual funds now yield an average of .06%… a whopping 4.6% point reduction from their yield of just two years ago.

Is it Sustainable?

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No, all of this tinkering is wholly unsustainable.  A country can only fund it’s own deficits and debt for so long; eventually easy money policy leads to inflation and a devaluation of the currency.  Recently, the Euro crossed the $1.50 mark in the foreign exchange markets- a possibly ominous sign that overseas investors are growing weary of United States policy (and are happier with the European Union’s policy).  The currency devaluation does prop up stocks – low yield in other areas leads to investments in riskier assets. However, the government needs investors in its debt to continue to finance things when running a budget deficit… let’s see how long it continues.

What do you think?

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