From the Daily Reckoning
BY ZACH SCHEIDT
What you may not know is that free market interest rates actually moved lower after the announcement.
There’s a big difference between the interest rate that the Fed sets for overnight bank borrowing, and the market interest rates that apply to mere mortals like you and me.
Today, I want to show you how that difference indicates growing risks to your wealth. More importantly, I’ll show you how to protect your wealth against these risks so you’re not harmed by the Fed’s irresponsible moves.
The Difference Between Fed and the Free Market…
The federal funds rate is the rate that applies to overnight bank balances that are borrowed or lent. This is the interest rate that Janet Yellen is talking about when she notes that the Fed is raising rates.
On the other hand, the interest rates on CDs, savings accounts and even mortgages are determined by the market. In other words, these rates rise and fall according to natural forces of supply and demand.
The way free market interest rates reacted to the Fed’s announcement was very interesting.
Even though the Fed raised its own target interest rate, the market interest rates moved lower.
Now why would that be?
The answer is that big institutional lenders and borrowers were expecting the Fed to be more aggressive.
No, they weren’t expecting more than a 0.25% interest rate hike this week. But they were expecting Janet Yellen to be more assertive when talking about raising rates in the future.
You see, one of the Fed’s primary jobs is to protect our economy against inflation. And the primary way that the Fed can do this is by raising interest rates.
If the Fed doesn’t raise interest rates fast enough, inflation could quickly spread and drive prices of goods and services higher. On the other hand, if the Fed does raise rates, it will cause more people to save money (because they are getting paid interest). And with a bit less spending, inflation will be held back.
Investors have seen that the U.S. economy is growing. They’ve seen that the employment market is improving. Basically, they’ve seen the signs of inflation approaching.
That’s why market interest rates were a bit higher ahead of the Fed’s meeting. Because investors expected Yellen to be more open to raising interest rates quickly.
But that’s not what happened…
The Fed is Asleep At the Wheel
Instead, during Janet Yellen’s press conference, the Fed Chair made it clear that the Fed wouldn’t be too aggressive in raising rates. In other words, the war on savers is still in full effect.
I found it very interesting to hear Yellen’s response to a question about the Fed’s bottom line message to the markets:
“The simple message is the economy is doing well.”
To which I have to ask, “if the economy is doing so well, why the heck can’t you throw savers a bone and raise interest rates?”
But Yellen isn’t taking my calls at the moment.
I’m not sure whether the Fed is scared of another market selloff, bought by indebted companies wanting to keep interest expenses lower, or just simply inept. But it’s clear that the Fed is planning to keep rates very low for an even longer period of time.
By the time Janet Yellen pulls her head out of the sand and sees inflation picking up, it may be too late!
Here’s What to Do to Protect Your Wealth
We’ve talked a lot this year about taking a balanced approach to investing. You don’t want to be too heavily invested in any one area.
Another thing to be very aware of is the danger of inflation.
Inflation can be especially painful for retirees and other savers because it often happens silently.
Maybe you don’t lose money in a market crash. But if inflation causes your savings to only pay for half of the things you were expecting to be able to buy, it’s just as bad as if you lost half of your money!
One way to protect against the threat of inflation is to have exposure to precious metals like gold and silver. In fact, during Yellen’s press conference (when it became clear the Fed would be acting more slowly than expected), gold and silver rallied sharply.
Today is a very good time to invest in precious metals like gold and silver. Right now, prices for these metals are very reasonable. But when inflation picks up, we should see gold and silver trade sharply higher (along with other commodities too).
I’ll be on the lookout for specific opportunities to help you protect your wealth against inflation. In fact, I’m researching a new opportunity for you that I think you’ll be very excited to hear about.
I can’t tell you the details today, but stay tuned for a full write up on Monday.
Here’s to growing and protecting your wealth!