The Federal Reserve’s continued zero interest rate policy (ZIRP) that has been in effect from the time of the financial crisis may bring with it some unintentional consequences.
The most common concern is that this ultra-loose monetary policy will eventually lead to a spike of inflation. My concern, however, has to do with investor behavior—especially older people on a “fixed income.”
Many of these people 5-7 years ago thought they could retire with some income from their CDs to supplement their social security. They thought could earn 3-4% and this could get them maybe $300 per month on a $100,000 CD. But with rates below 1% they are earning maybe $300 per year!
I fear this has led many seniors to make tough decisions. How many have had to go back to work—if they can even find work? How many have had to cut back? How many have had to raid their principal? And, my biggest concern, how many have changed their investment behavior?
Did some of these investors move their money from CDs to bonds in early 2013 due to the bond market’s good results in 2012 only to lose money last year? Are these same individuals getting ready to jump into stocks with some of their assets because of the strong returns of US stocks last year? Keep in mind the five year return of the S&P 500 looks pretty good now since 2008 is no longer included. How many are thinking the stock market is not as risky as it once was? And what are the consequences if large numbers are doing this?
I don’t have the answers, but all actions have consequences, including an endless ZIRP.