For decades, commentators on the Federal Reserve Board (the Fed) have referred to the action of raising federal funds interest rates as taking away the punch bowl at the party. After finally arousing from sleep after the inflation fire was already getting out of control, Fed Chair Jerome Powell has been doing his best to convince all concerned that it is absolutely serious about shooting down the rate of inflation balloon to its desired 2 percent level.
May I remind you that a vocal minority of us have said since the late 2000’s, including Kansas City Fed Governor Tom Hoenig, that the Fed should have allowed rates to quickly normalize to a 4 or 5 percent rate after the 2008 panic? Had we done so, we would not be in this position now and we would not have had history’s slowest recovery from a financial panic.
This Fed fantasy that it can fine tune economic growth is firmly entrenched among the national class of Ph.D economists wasting computing power upon their modeling algorithms. These models make sense to them, but never actually correspond to the invisible hand action of millions who make their individual financial decisions whether to buy, sell, hold, or run for the hills.
Better late than never (but 14 years later?), savers are finally being rewarded for the time value of money. My purpose today is to give you some idea of the range of interest rates available for your little part of the trillions of dollars of all forms of money still sloshing around in our system.
Although the Fed leaders got their wish—for years they complained that we did not see at least their desired 2 percent annual inflation—now they imagine that the runaway horse is definitely headed toward the barn. Certainly it will become quickly docile and behave itself according to their wishes.
Have you ever noticed that once the general level of prices has raised, the level never falls backward so you can be back in the better place you were? No, they argue that would be terrible and there should never, ever be any deflation so you could actually get more for your money. The following chart should leave you with little doubt that deflation could be a problem.
At any rate, making some money on your money is the goal. Right now the yield curve is inverted, meaning that short term money is earning more than long term loans. (This generally also signals that a recession is coming.)
Because of this and our caution regarding a continued uptrend in most stock prices, we have loaded up our truck with Treasury bills ranging out through the summer. The rates change every day, but according to TD Ameritrade Institutional website yesterday, February 7th, one can receive a high of 4.9 percent annualized on a Treasury Note that will mature on December 31, 2023 if you or your broker purchase $40,000 worth or more.
You can lock in a smaller interest rate for a longer time period, but you run the risk of a continued inflation higher than your yield. Example, the Treasury Note maturing February 15, 2026, can provide you with 4.07 percent, but if inflation remains higher than that, you will be losing some money very safely.
The best yielding CD’s listed yesterday promise a gain of 4.75 percent per year if you lend to Burke and Herbert Bank of Alexandria, Virginia. But if rates drop, as early as February 13, 2024, the bank can give you your money back, what is known as Calling the CD back in. A three year rate of 4.2 percent is offered by Open Bank of California.
If you want more certainty of expectation, you can lend your money to our federal government until August 15, 2052 (when I will be preparing to celebrate my 100th birthday, Lord willing), but do you really think that 3.7 percent interest will reward you for the risk of losing that much purchasing power? See chart above! We are not of the opinion that a recession or this current bear market will last more than months from now, so we would suggest caution in tying up your money for any long periods. You can sell these earlier but you will not know until you desire that how much you would receive. As you know though, Past Performance is No Guarantee of Future Results! That is a certainty.
(Past performance is no guarantee of future results. The advice is general in nature and not intended for specific situations)