We may have pulled out of the recession and headed into recovery, but the Fed isn’t ready to let go of its efforts to push the recovery forward.
The Fed is continuing to keep interest rates low in an effort to improve the economy. Low interest rates foster borrowing, which in turn fosters spending. The more people buy, the more money goes into the economy.
But if the Fed lets it go too far, there could be an increase in demand, which supply can’t keep up with, leading to inflation.
The United States economy hasn’t yet hit the level the Fed wants, which is why it’s not increasing rates yet. Until the unemployment rate falls below 6.5 percent, interest rates will remain below .25 percent, according to GoBankingRates.com.
Inflation is the other factor used to determine these interest rates. If inflation is too low, interest rates will remain low as well to spark economic growth.
The Problems with Low Interest Rates
But it’s a delicate balance. If interest rates remain low for too long, it could lead to excessive economic growth. While that sounds like a great situation, it’s not. Too much growth leads to hyperinflation, which lowers the value of the U.S. dollar.
Low interest rates also encourage debt. Encouraging debt means people may have trouble paying it off later, which will ultimately be detrimental to the economy. People won’t have money to put back into the economy, which then lowers demand, prevents growth, and causes economic decline.
For the investor, low interest rates make saving less attractive. If borrowing costs are low, it can be more attractive to take on a mortgage, for example, and savings may not generate as much interest. But if rates stay low for too long and people turn away from saving too much, this can lead to economic trouble down the road.
Investing in Low Interest Rate Environments
Since investors turn away from savings when interest rates are low, riskier investments become an option. These include bonds, stocks, ETFs, and REITs.
The problem with bonds right now is that they are overpriced. You may purchase them now and end up losing money because their value decreases when interest rates go back up. Since the U.S. is on an economic upswing, bonds aren’t the best to invest in.
It is a good time to sell them, however. They are at a high value right now, and it’s expected this will decline as the unemployment rate decreases and interest rates rise.
Stocks are attractive for investors right now because they are underpriced due to the interest rates, and they won’t remain that way when interest rates rise. That means investors should start considering them as part of their portfolio.
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Real Estate Investment Trusts (REITs)
REITs are businesses buying commercial and residential property. They rent it, and the profits go to the shareholders. There has been an increase in the number of REITs lately because the low interest rates have boosted the housing market.
As home buying has picked up, this has knocked down some residential REITs relying on renters. However, as interest rates rise, the rental market could heat back up again, and investors in REITs could see gains.
With the interest rates rising slowly, it won’t be long before REIT investors to start to see profits.
ETFs or Mutual Funds
Exchange traded funds (ETFs) track stocks on the NASDAQ-100 Index, S&P 500, Dow Jones, and others. ETFs follow the index – they don’t outperform it. With the market doing so well right now, ETFs are doing well also. They’re an excellent way to diversify a portfolio.
If you’re looking for a return on your investment quickly, stocks, REITs, and ETFs are what you want.
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