brown on green, A Regular column about finances

by David Brown

Will Interest Rates Ever Rise?

Interest rates are at historic lows. Many individuals depend on interest income, and with rates this low, their income is getting squeezed. Certificates of Deposit (CDs) first came into existence as a financial instrument in the 1960s but did not become popular until the 1970s when inflation was rampant. Following that period, individuals began to develop portfolios of CDs that would keep pace with inflation. CD rates today make that goal impossible.

In 2008, the Federal Reserve began cutting interest rates to stimulate the economy. It did not stop cutting rates until December 2008 when it set the Federal Funds Rate (the rate banks borrow from one another, usually on an overnight basis) at between 0 and .25. This caused interest rates to fall on every type of investment. Short-term government bonds actually became negative at some points during the crisis. Investors were willing to take a negative return to let the government hold their money for 90 days or less. Even the 10-year government bond has fallen to a new low this year.

The Federal Reserve has declared that it will keep interest rates at the current level until the middle of 2015. It’s possible they could extend that mandate even further. Even if rates begin to rise in mid-2015 or early 2016, it will be some time after that before the rate increases are felt in CDs. It could be as late as the end of 2017 before interest rates return to the levels they reached in 2007 before this crisis began.

This creates a difficult environment for those who need steady income. Investing in long term CDs will lock in these historic low rates of return. Some have turned to dividend stock portfolios because the yield is better than CDs, and the portfolio can be sold when interest rates rise to a more reasonable level. Others have enjoyed this low interest rate period, refinancing their homes or buying new homes at record low interest.

The Free Will Baptist Foundation offers a solution that may work for many. We offer Money Management Trusts (MMT) paying 2.75% (better than the highest CD rate currently offered in the United States). The rates on MMTs are variable but set at six-month intervals (January-June and July to December). Historically, our rates have always outperformed money market and short-term CDs and have been competitive with five year CDs.

It has been a difficult environment for those who need good yields, and it may be several years before it gets better. Perhaps we can help. Call or email the Foundation for more information on Money Management Trusts: 877-336-7575 or foundation@nafwb.org.

David Brown, CPA, became director of the Free Will Baptist Foundation in 2007. Send your questions to David at david@nafwb.org. To learn how the Foundation can help you become a more effective giver, call 877-336-7575.