By Lee Gardner
Come February, Federal Reserve Chairman Ben Bernanke can head for a vacation and pass the economic stress to Vice-Chairman Janet Yellen. Senate confirmation of Yellen is all but certain. But what will this mean in terms of economic direction and monetary policy?
Following the 2008 economic collapse, “the new normal” meant that rates for saving arguably made it a reasonable decision to bury your nest egg in the backyard. Rates for certificates were less than ½% even if you committed to a term of several years. U.S. Treasury rates were even less. These returns have been horribly unfair to investors living on a fixed-income.
The news was better for consumers purchasing a home or refinancing their mortgage loan. For a time you could find a fixed 30-year mortgage for less than 4%. Since May, those rates have moved up to around 4.5% – still awesome compared with trends of the last 50 years. But with mortgage rates moving higher and a leadership change at the Federal Reserve, what should we expect in 2014? Where should you invest your money? How high will mortgage rates go?
With mortgages, rates under 4% probably were lower than they should have been. Housing drives economic growth, and although the extremely low rates were intended to stimulate new purchases and home building, they actually resulted in a massive wave of refinancing. This wasn’t all bad, because a lower mortgage payment meant an increase in monthly disposable income, which stimulated the economy.
After the Federal Reserve lowered interest rates to near 0% in 2008-09, it began purchasing Treasury bonds and securities to further stimulate the still weak economy and keep mortgage rates low. In late May of this year, the Fed tried to curtail its bond-buying strategy but dialed back on the idea when mortgage rates jumped.
So what happens in 2014 and where might the average investor find a reasonable return on savings and investments? Will the Fed continue buying bonds or finally give it up?
The Federal Reserve typically keeps its focus on two economic indicators: inflation and unemployment. Although unemployment has remained problematic, inflation hasn’t happened as expected. Yellen is particularly concerned about the high unemployment rate, and she has a greater fear of deflation than she does inflation. Deflation is of grave concern because producers get lower prices for products that cost more to produce. This could lead to another severe recession and a rise in unemployment.
She actually has alluded to cutting short-term rates to 0% from the current 0% to .25%. This could be a strategy to calm the markets while drawing an end to bond-buying. I will not be surprised to see this happen in February or March.
What does this mean for interest rates? I agree with economists who think a more traditional interest rate yield curve will return. This means short-term interest rates will remain very low and longer term rates will be higher. The best earnings in 2014 likely will continue to be in stocks and mutual funds. And if you earned even half the return that was earned in 2013, it would greatly outshine the yield from savings or certificates. Fortunately Family Trust offers both – competitive rates for savings, certificates and IRAs, and a nationally recognized investment advisor, Matt Griffin, who shares our philosophy of doing what is right for you.
What’s the best option for you?
If you are nervous about stock market fluctuations or will need all or some of your savings in 2014, I recommend you consider our saving options. Here are three:
Payback Savings: When you qualify by using certain products and services1, this account pays a rate that averages 1.00% APY or higher and funds can be withdrawn without penalty. And we offer three tiers for dividends based on the balance – the more you save, the more you earn.
PayBack IRA: Like PayBack Savings, this IRA earns a higher dividend when you meet certain qualifications. It’s a great option for a 401(k) rollover and meets all IRS requirements for an IRA2.
All savings at Family Trust are insured up to $500,000.3
Bump Your Rate Certificate: This 3-year certificate has a higher yield but also allows the investor – when rates go up – to request an increase twice during the 36-month term with no fee or term extension.
This has been a year of sustained, but slow, economic recovery. For those waiting on higher savings rates, you may continue to be disappointed in 2014. For others, I think 2013 and 2014 could be among the best for market returns in the past 25 years.
Let us know how we can help determine your best option. Visit a branch or contact Matt. We’re here for you.
Lee Gardner is president and CEO of Family Trust.
2 Please consult a tax advisor for additional information regarding eligibility for tax deductions, tax and penalty free withdrawals, and eligibility requirements for IRAs.
3 Deposits up to $250,000 are insured by the National Credit Union Association and up to $250,000 by the Excess Share Insurance Corp.