By Jack Hough
Savings accounts are paying next to nothing, but next to stocks, dollars are doing great.
Most savings accounts pay less than 1% right now, and rates won’t increase for at least two years, the Federal Reserve suggested yesterday. Why? It wants to nudge savers into following its A-B-C investment plan: anything but cash. The idea is that if savers buy stocks or real estate instead of sitting in cash — or even better, spend — the economy will grow, markets will recover and all will end well.
But investors should consider carefully whether it’s a good idea to follow a financial plan hatched in Washington, D.C.
The Fed’s goal at the moment isn’t to protect savers. It’s to use the resources of savers to make up for the excesses of borrowers. The plunge in stock and house prices in recent years wasn’t a return to historic levels of affordability, in the Fed’s view. It was a problem that needed to be fixed, fast.
“Don’t fight the Fed,” you might have heard. Indeed, U.S. stocks roughly doubled in price in two years after hitting their March 2009 lows. But savers who’ve been fighting the Fed since then aren’t doing too badly, if stocks are the asset they covet, and they’re waiting for prices to come down. Relative to the dollar, savings accounts have returned next to nothing this month, but relative to U.S. stocks, they can buy 14% more than they could on Aug. 1.
Gold has done even better of course, and if I had to guess, I’d say it will soon top its inflation-adjusted record of nearly $2,400, set in 1980. But gold is no safe haven. It’s a speculative instrument with no income-producing ability and little industrial use to fall back on. Grab gains if you’re nimble but don’t fall in love with the stuff.
Fed-fighters should stand firm for now. There are better bargains in store for stock buyers, I believe. That’s not to say investors should be out of the market altogether. But they should hold a generous pot of cash, and not be bothered by the puny stated interest rates on their accounts.