Impact of “No Rate Change” on Investors

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The much awaited decision by the U.S. Federal Reserve as to whether to start raising interest rates was answered in the negative yesterday, while still leaving open the possibility of an increase before year end. “Heightened uncertainty abroad” and “prospects of low inflation,” both of which are reasons not to raise rates, were deemed more important at this time than “improving labor markets” and “reducing slack in the economy,” which would have been reasons to start raising rates

Financial markets had little reaction. Stock prices rose initially but ended the day modestly lower, and bond prices gained, but only back to last week’s levels.

While low interest rates are designed to benefit economic growth, they have a negative effect on investors looking for safe ways to earn interest on their money. This adverse impact on conservative investors has not been sufficiently highlighted in the Fed’s ongoing decisions to keep rates at close to zero starting in 2008. Conservative investors have had to add riskier investments to their portfolios to try and earn even modest investment returns. While taking on this added risk has worked well since 2008, it still has its unsettling moments (as recently as August), and carries no certainty that the results will continue to be  favorable.