On August 9th Ben Bernanke, Chairman of the US Federal Reserve, made an unprecedented announcement (I guess by now we should be used to unprecedented announcements from the Fed). He announced that the Fed would keep US target interest rates low for two years. Never before has the Fed committed to a time-span for its interest rate policy.
Many investors were disappointed that the Fed didn’t announce a further economic stimulus measure but in fact the actual announcement is much more useful because it helps bring certainty to what has become a very uncertain investment market.
If interest rates are to remain low, this creates less competition for fixed income type investments. Bond prices go down as interest rates go up and one of the great uncertainties in the bond market during this extended low-interest rate period in which we have been living has been when to get out of bonds, as surely interest rates must rise at some point. Indeed a few months ago I wrote in this space about my concerns regarding fixed-income investments. Now we know that interest rates won’t rise for a while but this is not to say there are no concerns about low-yielding bonds. A concern that remains is that this low-interest environment may spur inflation and if inflation is running at, say 4%, then investors wouldn’t want to be locked into low-yielding bonds.
Low interest rates also create less competition for investments that do not pay an income; commodities for example – especially commodities such as gold that do not trade solely on supply/demand fundamentals. If we could get a decent yield in a savings account then we might be less inclined to put our money into something that is more difficult to value and does not give us a cash flow – we might put our money in the bank rather than holding gold...
Read more at http://www.expatfocus.com/tom-zachystal-220811