Interest Rates and Elections: How Today's Climate can Affect Retirement Finances

 Fed reserve

What do Donald Trump, Hillary Clinton, the chairperson of the Federal Reserve, and retiring Americans all have in common? In a word, interest rates – or, more precisely, how interest rates affect all of these parties.

What the Fed sets as its interest rate agenda has broad implications for the U.S. economy. It has multiple touchpoints, including Americans’ retirement income security. With that said, political climate can also be impactful. It can be influential in shaping the debate over Fed interest rate policy.

In our previous Federal Reserve blog post, you may recall how we distinguished between “permanent” income and “maybe” income – and how interest rates can affect these retirement income types. Here’s a quick look at how our current climate of political affairs, the outlook for Fed interest rate policy – and what it may mean for income-generating vehicles funding our retirement.

The Landscape
In recent headlines, Trump has criticized Janet Yellen, chief of the Fed, for keeping interest rates low. He has alleged that this policy is politically motivated, aiming to preserve President Obama’s economic legacy. In response, Yellen has reinforced that Fed interest rate policies aren’t politically motivated – after all, the Fed is politically isolated from Congress, the presidency, and other parts of the federal government.

Why does this matter? In a nutshell:

  • This has led to speculation that Yellen may resign if Trump is indeed elected president
  • These developments come at a time when conditions are tense among the Board of Governors of the Federal Reserve
  • There has been talk of an interest rate hike sometime this year, but the Fed keeps dragging its heels
  • Fed officials have justified the hike delay by noting they are waiting for more evidence of efficient economic recovery
  • They are antsy about the uncertainty of the election and its effects, among other variables, so it’s been a “wait-and-see” approach

The long, drawn-out timeline of interest rates being low (for instance, until December 2015, the federal funds rate had hovered at 0-0.25% for over 10 years) has affected retirement income-generating vehicles. The low interest rate trend can be seen in this graph, courtesy of the Federal Reserve Bank of St. Louis.

Federal Reserve Graph

Looming Developments and Effects on Retirement Income

Savings accounts, CDs, bonds, and other interest-bearing assets have gotten meager interest earnings for years, which are all income-generating vehicles that fall on the lower risk profile side. Let’s illustrate some of these in detail. Instances of lower interest rate earnings are observable in the graphs of bond yields and CD yields below.

Bond Illustrations

elections and interest rates how todays climate can affect retirement

CDs Illustrations

elections and interest rates

These CD yields data are courtesy of

Apart from interest rate hike decisions, Yellen must deal with growing divisions within the ranks over interest rate policy itself – namely, whether interest rates should stay low, and if so, for how long. The goal would be to spurn investment, boost consumer spending, and help fuel overall economic expansion.

Interest rate policy, and by extension what the Fed decides to do from here, affects retiring Americans in a variety of ways:

  • Continuing low interest rates may motivate retiring Americans to seek out investments with stronger return potential
  • However, such investment shifts will leave money exposed to greater market risk, which can impact income security
  • If interest rates rise, the market value of bonds will fall – interest rate risk
  • Should interest rates increase, inflation may pick up, which may lead to companies cutting back on their payrolls
  • Americans nearing retirement or working in retirement may be affected if they are part of any such payroll downsizing
  • And if interest rates stay where they are at now, there is risk for inflation to pick up at a more dynamic pace
  • There may be other market dynamics, depending on what actions the Fed takes, apart from the U.S. election outcome

Yellen is insulated from Trump being able to terminate her chairpersonship due to policy view differences (at least until her term expires). But the heat from Trump’s assertions, and the uncertainty of how the election will turn out in November, makes things more difficult.

We are likely to see an interest rate hike, but not at the Fed’s November meeting, which is a week before the election. It may come in December. Aside from any interest rate hike decisions, how the election turns out may lead to some volatility within financial markets, as well.

What’s the Takeaway?

As we have reinforced before, Fed policymaking is just one of many things which affects the economy – and by extension retirement finances. In our opinion, a retirement financial plan should emphasize monthly income goals and cash-flow requirements to meet them. It should also have suitable measures in place to protect your assets and make sure they are around to generate the income you will need.

If you're ready to plan for your retirement future, or see if you can take any further steps, can help you. Use our Find a Licensed Advisor section to connect directly with an independent financial professional, and to request a personal strategy session to discuss your needs and goals. And should you have any questions or concerns, call 877.476.9723.

Author: Ian

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