Interest Rates And The Perfect Investment.
At precisely 2 pm eastern time today, the Federal Reserve Open Market Committee will flash to all the world, their latest decision on Interest Rates.
By all accounts, Wall Street is absolutely convinced that the Fed will raise interest rates by half a percentage point. Bringing the new Fed Funds Rate to an even 1%.
And if by rare chance the Fed would miss that mark, say be either higher or lower, the financial community will go into apoplexy.
When the reality is, that a quarter percent one way or another will not really make that much difference to those of us who live out here on Main Street USA.
For us, this financial world that we find ourselves in hasn’t been right for some time. Ever since that self-same Federal Reserve decided to lower interest rates to virtual zero. Nothing has gone right. At least not much financially.
So, I thought I would take you back to a different time. A time, when the average person could do alright with their investments, and still not take a lot of risks.
The year was 1984. The country was just emerging from a severe recession. High inflation was, at last coming under control. Thanks, at least in part, to the Fed’s own high-interest rate policy. A policy that broke the back of the high inflation, and low productivity of the 70s.
What we now call “stagflation.”
Sound familiar?
Now, you have to remember that the 1980s did not have many of the investment options that we take for granted today. There was no electronic trading. If you wanted to buy or sell, you had to call a broker.
No Exchange Traded funds back then. And money market funds we just coming into their own. Very few of the options and derivatives, that makeup so much of today’s sophisticated investment funds.
But there was one thing that we had in the 80s, which is almost totally missing today. Savings accounts. Accounts where the average guy or gal, could just deposit cash, and earn interest.
Simple. Straightforward. And combined with Government Insurance FDIC FSLIC and so on. These were as close to risk-less investments as you could get.
There was one particular type of savings that was selling like gangbusters back in 1984, and that was the CD. A Certificate of Deposit.
It was like a regular savings account, but in addition, you had to promise to keep your money in the CD for a stated period of time. Take the money out early, and you’d have a penalty.
You can imagine that these were very popular. As a broker, many of my clients back then invested in CDs. And why not. The top CD, A Jumbo with a $100,000 investment was yielding just under 12%.
That’s $12,000 dollar per year in income. That would go a long way to supplement someone’s retirement. And you guessed it. Retirement communities jumped all over these guaranteed Certificates of Deposits.
From a big picture perspective, having access to all of this capital was a win-win for our financial system.
For the investors it presented a safe and secure alternative to the more risky investments in stocks.
While for the banks it provided a capital base which went on to help stabilize the financial system. And grow the economy throughout the rest of the decade and beyond.
Today when I talk to investors I think that these would be ideal alternate investments today.
Unfortunately, although you may still find a few CDs the market is but a mere shadow of its former self. Gone are the meaningful returns of 30 years ago.
Brought down by the low-interest-rate policies of the Federal Reserve.
Much will be written about the effect of today’s interest rate hike on Big Banks, the Big Funds, and the Big Brokers.
But little mention will be made about a group left behind a generation ago: the savers.
