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What the Fed is Going on?

What the Fed is Going on

One factor which can affect retirees and pre-retirees is changing interest rates. Specifically, it’s a matter of whether they’re rising or falling – and what effects it may have on retirement income.

This week brought news from the Economic Policy Symposium, an annual gathering of Federal Reserve officials, other central bankers from across the globe, and policy experts. It’s important because the participants share their insights on many trends – including what the Fed may do with interest rates in the future.

An interest rate hike would have many effects. So here’s a quick look at what emerged from the gathering – and what it may mean for retirees and pre-retirees.

The Backdrop

To begin, it helps to break down the discussion into two facets: effects on permanent income and effects on “maybe” income.

  • Permanent income is the guaranteed income you get from sources such as Social Security, defined-benefit pensions, and annuities.
  • Maybe income is the income you pull in from more volatile investments such as stocks and bonds.

Now, let’s go back to the symposium. In general, discussion centered around dealing with the conditions of a “post-crisis” world – namely, the lingering effects of the 2007-2009 recession and the attempts at recovery.

In the aftermath of the recession, central banks moved interest rates to historic, artificially low levels. The goal was to encourage borrowing at the lower rates, which would help spurn business expansion and consumer spending.

However, there has been persistently slow growth. And over the years, the Fed has maintained its commitment to a low interest rate environment. That isn’t to say there haven’t been increases. Interest rates rose to 0.25-0.5% in December 2015 – but that was after the Fed had kept the same agenda for almost a decade.

What’s the Verdict?

There are many insights which are important takeaways from the symposium. But the most important takeaways are the perspectives of Janet Yellen, the Fed’s chairwoman, and the other Fed officials. Over the past year, there had been talk of a new interest rate hike. But it had been shrugged off due to a number of factors, including subpar job growth and other sluggish markers.

However, things are on the rebound. Today, it was announced that 177,000 jobs were added in August. Fed officials had anticipated this growth and other variables as positive indicators of a need for a change in direction. With that said, it appears an interest rate hike may be in store later this year:

  • Including Yellen, six of the 10 Fed officials who are voting members of the Federal Open Market Committee – which controls interest rate-setting policy – have expressed openness to or approval of a rate increase.
  • Four of the ten voting officials have said they prefer a waiting approach or haven’t spoken publicly on where they stand yet.
  • Among the non-voting members, five out of seven Fed officials support an interest rate hike – possibly even two hikes by the year’s end. 

Now, what does all of this mean for us?

Impact on Retirement Income

In terms of the effects rising interest rates may have on permanent and maybe income:

  • It can affect the income security of seniors and retirees drawing on earnings from bond holdings (maybe income). When interest rates rise, the market value of bonds tends to fall – the effects of interest rate risk.
  • Some bonds are more sensitive to changing interest rates than others – treasury bonds and high-quality corporate bonds, for example. Holders of these bonds are more likely to suffer some income effects.
  • Other bonds, like high-yield corporate bonds and short-term issues, are not as vulnerable, but will still feel some effects from moving interest rates.
  • For retirees and pre-retirees using stock earnings for income, rising interest rates are often good news (especially for financial stocks).
  • It often helps boost corporate earnings, which can lead to better investor returns, but the earnings may be eroded by inflation and future market downturns.
  • CDs and retirement saving accounts will benefit from the boost, but returns are likely to stay on the low end as they have been for years.
  • As for permanent income effects. As one Fed official noted, life insurance companies are making business decisions now based on the low interest rate environment.
  • A rate hike may impact their decision-making, which will affect insurance product options for retirees and pre-retirees.

Perhaps most notably: An interest rate hike can lead to inflation growing at a faster pace. Rising inflation affects the costs of goods and services for businesses, as well as the expectations of workers for wages.

It may lead to companies cutting down on their payrolls, which could impact older Americans who still work to supplement their income.

What Does This Mean for You?

The Fed’s policymaking is just one of many events which impact us every day. At the root of things, asset protection and income are critical financial priorities in retirement. Your retirement plan should not only protect your “Safe Money,” or the monies you can’t afford to lose, but also ensure your assets will be around to generate income when you need them.

If you're for help with safeguarding your Safe Money and making it work for you, can assist 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.

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