Imagine that a politician came up to you, shook your hand and said the income from your retirement plan was subject to a 50 percent tax, due immediately. Among other things, you’d question his or her sanity!
Well, you guessed it, that chop in half is exactly what the Federal Reserve did by effectively gutting fixed income returns in retirement plans – instead enacting policies to inflate asset prices. That’s a tough pill to swallow for savers and retirees alike. Where does it leave us? In a pickle, I’m afraid.
Interest rates should have normalized long ago, but the race to zero percent took too strong a hold. That means the corrective path to higher rates is now sure to be fraught with volatility, which could spell disaster for retirement plans.
Because of the political implications, the Fed hasn’t mustered the gumption to raise interest rates. And it doesn’t seem this edition is any different. It knows, like its predecessors, that when rates rise, the market will react – and it doesn’t want to be blamed…not just for a sell-off, but for a recession.
And make no mistake, the big R may very well arrive. And watch out, if/when it does. Because typically the Fed reduces interest rates in a recession by 5.5 percent. If that were to happen tomorrow, we’d be at -5 percent!
Clearly heading off the next recession is a priority – or at least it should be.
Because if a recession hits in the next five years or so, we’ll need room on rates to recover. And right now there isn’t much, if any.