Interest Rates: Artificial Suppression Versus Natural Rise
The marketplace is rife with concerns, discussion, and prognostication over the low, manufactured interest rates that have prevailed since 2008/2009. Last week, Federal Reserve Chairwoman Janet Yellen defended keeping rates low… for now.
When asked when rates might rise, Ms. Yellen replied, “It will depend on the progress of our economy and how we assess it based on a variety of indicators,” which would include, “…progress toward our two congressionally mandated objectives: maximum employment and price stability.”
Whether rates rise or continue to be held down, the truth is that both scenarios are problematic.
As rates steadily declined over what we now realize was a long period of time, bonds performed very well and many investors responded by “chasing” those returns, plowing record dollar amounts into bonds and bond funds. We are pretty sure that when the rock band Blood, Sweat & Tears sang, “What goes up must come down,”in their 1969 hit Spinning Wheel, they weren’t referring to mean reversion, but the phrase definitely applies here.
Even if interest rates stay put, prudent investors who are looking for diversification away from the volatility of stocks and related asset classes fear that they will be handicapping their portfolios with each incremental addition to fixed income. We are already seeing, and many investors are likely feeling, the effects of this impairment; however, the traditional counterpoint of excessive volatility will be no more palatable.
What do you think of the current interest rate environment and the affect it will have on future investment strategies?