Patience a Virtue for Fed and Savers
04/26/2012 6:30 am EST
Interest rates will gradually head higher as the recovery takes root, requiring discipline from income investors, says Barron’s Editor and President Edwin A. Finn, Jr..
We’re talking about the Federal Reserve with Ed Finn. Ed, what do you see when it comes to quantitative easing in the coming year?
Kate, there’s been a lot of talk about QE3, the third program of quantitative easing. We don’t think it’s necessary. We think the economy is humming along alright. What Bernanke has said is he’ll be vigilant, and if the economy starts to falter, he’ll go into QE3.
The Europeans are still doing some quantitative easing, and they may need it more than we do. But if we can get by without it, it’s almost like getting better without using drugs. It’s healthier for the economy.
And what about raising interest rates at some point? What do you see on that front?
Well, I know a lot of savers would like to see higher interest rates, and a lot of financial institutions that are maintaining money market accounts and actually losing money in the process would like to see higher interest rates.
I have to say that I think we’ve been in emergency mode for almost five years, and interest rates are being held at unnaturally low levels. That’s really penalizing investors and savers, so I think once we get back to equilibrium in the economy, you will see rates rise, although I don’t see them running away quickly.
Now, for individual investors. What does all this mean? What should people be aware of when it comes to their own portfolios?
Well, in terms of people holding mortgages or refinancing, now is probably a good time to lock in those things, because I think there is a very good chance rates will go up from here. However, we can’t say exactly when they’re going to go up.
So people who need income need to stay short. Don’t be tempted to run on that curve to ten years, because you’re not really getting paid for it.
In some cases, as I’ve said, we think it’s important to use dividend stocks to get some of your income, because if the economy is improving, you’ll have the dividend, but you’ll also get the lift in the stock market. Then if you’re short-term in your income investments, you can move out longer as you’re getting paid better for it and rates go up.
Let me ask you specifically to come back to the question of quantitative easing. A lot of investors who follow the commodities market would be very concerned if there is no more quantitative easing. What should they be concerned about?
Well, I think commodities, they have had rides because of quantitative easing, and you could argue that the Fed has caused some problems in the third world, including in Northern Africa, because they drove up commodity prices trying to save Wall Street. There’s no question in my mind that there’s a link between keeping interest rates low and forcing up commodity prices around the world.
I think commodities will be a good investment. However, it will be geared to the growth of China, the growth of India, and the growth of developed countries…which will be, of course, at a slower pace.
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