Savers: Are better yields ahead?
|By Laura Bruce Bankrate.com
Inflation bloats the prices we pay for goods and services.
But if inflation, or the threat of it, keeps the Federal Reserve
from lowering short-term interest rates, then it will bring a smile
to the faces of people who rely on fixed-income returns, because
right now they're getting pummeled on two fronts.
Consumers are paying higher prices on everyday necessities such as food and fuel. But the interest they're getting on cash and CDs is nothing short of lousy. If the Fed stops cutting rates, interest on deposits may stop dropping.
But it could be quite some time before high-yield CDs, now averaging 3.4 percent on one-year investments, are routinely paying 5 percent or better as they did from April 2006 to October 2007. (You can check CD rates on Bankrate.com.) If you want liquidity, you're taking an even greater loss on money market funds, which also topped 5 percent last summer. They're considerably worse for wear, now paying an average 2.38 percent, according to the Crane 100 Money Fund Index.
Peter Crane, publisher of Money Fund Intelligence, says it's still a guess as to what rates will do over the next six months. "It looks as though consumers will not hit that maximum level of pain, which is yields below 2 percent," Crane says. "A lot depends on whether the worst is over and this recovery is real. But I would expect that the most probable outcome is flat to slightly higher toward the end of the year. Yields could go down if we have another shock, but they won't go much further because we're getting close to a bottom."
Crane says he doesn't believe that inflation will pressure the Fed to raise short-term rates to any significant extent. "Inflation, I don't believe, is a big deal. Everyone's worried about gas prices, but the commentary that money market rates are trailing inflation is incorrect. If you look at the Consumer Price Index, you get a 4 percent (inflation rate), but if you look at every other rate, you get 2 percent. So, it's far from clear whether there is a substantial uptick in inflation. The Fed would stop cutting, but I'm not a big believer that inflation is a terrible threat."
Herb Hopwood, Certified Financial Planner and president of Hopwood Financial Services in Great Falls, Va., also says the economy isn't out of the woods yet, but he takes a slightly different stance regarding inflation.
"I think (the Fed) will probably try to keep rates down here until they get an all-clear sign that things are OK. I don't think they'll lower rates further, but I don't think they'll be raising them for a while either. However, there is a lot of inflation that's starting to build in the system, and I believe that a year from now you'll be looking at 1 percent, maybe even 2 percent, higher interest rates."
If you believe inflation is a concern, you can take some steps to hedge against it and protect your portfolio. William Larkin, fixed-income portfolio manager at Cabot Money Management in Salem, Mass., suggests adding protection against domestic and global inflation.