By Ben Baden

Two more years of low rates means savers will continue to be punished

The Federal Reserve's latest policy meeting offered at least one surprise: a rare timeline for its current low interest-rate policy. After lowering short-term interest rates to virtually zero during the depths of the financial crisis in late 2008, the Fed announced Tuesday that it plans to keep them there for at least another two years. The reasoning behind the decision is that lower rates should encourage consumers to spend and businesses to increase lending, thus boosting the anemic economic growth rate. But there are clear winners and losers.

"There's a divide that makes this low interest-rate commitment by the Fed really positive or really negative, depending on which side you come down on," says Richard Barrington, a personal finance expert with "Savers have largely been victimized by this environment, while borrowers have been the beneficiaries."

If you're primarily a saver -- in or nearing retirement, for example -- you'll continue to see paltry yields on investments like money market funds or certificates of deposit. Today, the average six-month CD yields just 0.41 percent, according to (In comparison, in 2007, a six-month CD yielded more than 5 percent.) "People saving for retirement have to put more money aside because they will earn less interest on savings, and people already in retirement have seen their income levels drop to a fraction of what they were," Barrington says.

Add to that the effects of inflation. While many expect inflation to cool off somewhat as the economy slows, it has been trending higher lately. Over the past 12 months through June, the Consumer Price Index (CPI), which measures the average change in prices of goods and services over time, has increased 3.6 percent, according to the Bureau of Labor Statistics. The problem, says Greg McBride, senior financial analyst at, is that inflation is a backward-looking statistic, while the yields you see on fixed-income securities today are forward-looking. "It's comparing what's behind us to what's ahead of us," he says. And looking forward, the future looks bleak for bond investors: Ten-year treasury bonds are only yielding 2.2 percent, the lowest level since early 2009.

So what's a saver to do?

Barrington says they have two options, neither of which are particularly appealing: save more or work longer. "People are going to have to get their minds around the concept of working longer," Barrington says. "If I work five more years, that's five more years of savings."

McBride says savers must stay diversified in this low-yield environment. "A well-diversified portfolio can produce income outside of just your cash and bond investments," he says. He recommends real estate investment trusts (REITs) and dividend-paying stocks of large, relatively stable U.S. companies. "Not only do they produce income, but they have yields that are a lot higher than what you're finding on your bonds and cash," McBride says.

He also suggests that fixed-income investors sell some of their bonds, which should have appreciated nicely over the past few months during the bond-market rally. Over the past three months, the Barclays U.S. Aggregate Bond Index has returned more than 3 percent. "Investors have the ability to rebalance back to their intended allocation by selling some of those appreciated bonds and using those proceeds to supplement the meager income they're receiving," McBride says.

On the other end of the spectrum are borrowers.

The Fed is hoping to light a fire under them by keeping rates low. "Mortgage rates are as low as they've ever been, and home prices have come down to the lowest levels in a decade in many markets," McBride says. Mortgage rates have fallen for the second consecutive week, with the benchmark conforming 30-year fixed mortgage rate now at 4.46 percent, according to's weekly national survey. That's 0.04 percent from the record low reached in October and November 2010.

If you're in a position to refinance, now is a good time. Before the financial crisis, mortgage rates were a lot higher. The last time mortgage rates were above 6 percent -- a more normal level historically -- was November 2008, according to Back then, the average 30-year fixed rate was 6.33 percent. That means a $200,000 loan would have carried a monthly payment of $1,241.86. Today, the average monthly payment for the same loan would be $1,008.62.

By keeping rates low, the Fed is hoping to spur lending and borrowing to help resuscitate the dismal housing market. The problem, says Keith Gumbinger of, is that a quarter of the real estate market is plagued by foreclosures, and the unemployment rate still hovers near 9 percent. Many borrowers simply can't qualify for a mortgage, he says.

While short-term interest rates are expected to remain low, mortgage rates won't necessarily stay near record lows, says Gumbinger. "The Fed doesn't specifically dictate what happens to mortgage rates," he says. "While they influence, certainly, where rates are in terms of monetary policy, if inflation or [economic] growth does begin to creep up, you'll see mortgage rates or other long-term interest rates begin to rise somewhat."


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