Even though the rate cut from the Fed is small, it has lofty goals.
Borrowers will be rejoicing; savers, not so much. Even though the rate cut from the Fed is small, it has lofty goals—to head off a slowing economy and potential job losses that would likely affect those at the lower end of the pay scale far more than it would those at the higher end.
According to a New York Times report, while the Fed has engaged in a series of rate increases to try to keep the job market hot but the inflation rate cool, it’s been under pressure of late from the White House to take interest rates in the opposite direction.
Its latest action, a rate cut at the beginning of August, is expected to make it easier for consumers and businesses as well to get financing.
But for those businesses’ employees on the saving end, rather than the borrowing end—as well as for retirees—the rate cut might not be such good news. According to Bankrate.com, retirees will see reduced yields on investments like fixed annuities, certificates of deposit and savings accounts.
In addition, the report says, “[l]ong-term care premiums and pensions are also squeezed,” while retirees are also unlikely to benefit from lower borrowing costs since they’re not likely to be in the market for big-ticket purchases where such a cut could save them some money.
And those preparing for retirement will see their savings grow more slowly, which is definitely not a good thing for those who had hoped that higher interest rates could help beef up their accounts.
Bond yields, the report adds, are not likely to “improve after a Fed rate cut,” particularly with further slowing of the economy expected. The report quotes Paul Schatz, president and chief investment officer of Heritage Capital, saying, “The markets are expecting continued economic deceleration, which means even lower rates. If somebody thought the economy was going to reaccelerate, then you would be selling bonds, not buying them. If you were a retiree, you would be staying very patient and waiting for an opportunity.”
Schatz also cautioned against junk bonds, which generally provide higher yield (along with higher risk). He’s quoted saying, “The time to buy junk bonds is right in the middle of a recession, not now. If a retiree says, ‘Oh my, I can go buy junk bonds right now, that’s great.’ But we’re close to a recession, junk bonds are going to get hit very hard. For a retiree, they have to have an element of timing to their investment.”
Those expecting or receiving public pensions need to beware, too, since lower interest rates will provide lower yields to such pensions and thus place underfunded pensions at higher risk.
If the stock market doesn’t provide enough return to make up for lost interest income, the end result could be higher taxes on residents of the state or municipality whose pension fund is feeling the loss.
Those who have long-term care policies will also want to beware of rising premiums—if returns on those policies don’t provide enough to cover claimants’ bills, the alternative is for the insurer to raise premiums.
One more thing: inflation could start to increase, and that would pressure retirees on both ends—income and outgo. Higher inflation brings higher costs, and coupled with lower interest rates that bring lower returns on retirement investments, that means retirees could be dealing with lower income just at the time they need more, not less, funds to see them through.
READ MORE:
Complete your profile to continue reading and get FREE access to BenefitsPRO, part of your ALM digital membership.
Your access to unlimited BenefitsPRO content isn’t changing.
Once you are an ALM digital member, you’ll receive:
- Breaking benefits news and analysis, on-site and via our newsletters and custom alerts
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical converage of the property casualty insurance and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor
Already have an account? Sign In Now
© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
Marlene Satter
Marlene Y. Satter has worked in and written about the financial industry for decades.
