“Adopt the pace of nature: her secret is patience.” ~ Ralph Waldo Emerson
Question: How long can interest rates remain this low?
Answer: July 29, 2020, the Federal Reserve Board met to discuss the U.S. Economy and offer guidance. As a quick reminder, the Fed is a Central Bank with two directives—the objectives are to provide price stability as it relates to inflation and maximize employment levels. Monetary policy is used to adjusting and regulate the supply and circulation of money in the economy. Fiscal policy is also used to reduce fluctuation in our economy yet differs in that it is driven by government spending and taxation to smooth out demand.
Lower interest rates are designed to encourage greater liquidity and flow of funds. This is important as we address the economic challenges brought on by the COVID-19 Pandemic. As a reference point, last summer, the low end of the Federal Funds rate was 2.25%. Six months later, it was down to 1.50%, and by March 2020 it had fallen to 0.00%. Given Fed Chairman Powell’s cautious tone, it’s not likely that rates will inch back to pre-pandemic levels any time soon.
As an aside, back in 1985, mortgage rates were in the low double-digit region. This is also the year I purchased my first home. I was determined and rates were not going to stop me from obtaining my goals. Outside economic factors were secondary to my long-term decision-making process. In comparison, Freddie Mac reported on July 30, 2020, that the average interest rate for a 30-year mortgage is below 3.00% at 2.99% (it had hit a low of 2.98% several weeks ago), and the average 15-year loan rate was 2.51%. Freddie Mac has recorded interest rate levels for 50 years and these current rates certainly fall in the category of historic lows which is good news for borrowers.
Although economic news is improving, overall economic activity is far less than pre-pandemic levels. The Coronavirus has brought a new kind of panic, fear and economic destruction to many sectors. Yields across the board are lower than most investors prefer and we’re likely entering a new phase of lower rates for a longer period of time.
ZIRP, NIRP, TINA, and FOMO
Deciding what to do with cash does pose a problem. Most investors would prefer a minimum return that outpaces inflation. Rather than wishing our way out of this environment, decisions need to be made about what to do with cash balances in this zero-interest-rate policy (ZIRP) environment. The good news is that we’re not faced with a negative interest rate policy (NIRP). Some people feel “there is no alternative” (TINA) while others have a “fear of missing out” (FOMO) mindset. Tempering facts with your unique risk tolerance and time frame parameters is key. We may find ourselves in this environment for a while. Working with your team of trusted financial professionals, including a Certified Financial Planner, and asking for help is a place to begin. It’s a good time to take a step back, review your long-term financial goals, determine what is best for you and take action to align yourself with those objectives. Stay hopeful, focused and invest accordingly.
The opinions expressed are those of the writer as of July 30, 2020, but not necessarily those of Raymond James and Associates, and subject to change at any time. All information provided herein is for informational purposes only and is not intended to be, and should not be interpreted as, an offer, solicitation, or recommendation to buy or sell or otherwise invest in any of the securities/sectors/countries that may be mentioned. Information obtained from outside sources is believed to be reliable but cannot be guaranteed as such.
“Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.” This article provided by Darcie Guerin, CFP®, First Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at 239-389-1041, email firstname.lastname@example.org. Website: www.raymondjames.com/Darcie.