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How does the Fed holding interest rates steady until 2014 affect my retirement portfolio?


The short answer is that it’s impossible to gauge   the full impact, although it’s virtually certain that any bank deposits, money-market accounts and short-term bonds you have will continue to pay next to nothing. As for longer-term bonds, rates could remain low and their prices high, which has been the case for several years, but it’s also possible that the steps that the Fed has taken to keep rates low – printing trillions of dollars – will stimulate inflation or at least the fear of it. That would send bond interest rates up and prices down as investors demand compensation for the inflation risk they believed they’re taking.
Stocks might do somewhat better. Companies are less bothered by inflation, as long as it doesn’t get out of hand, because they can raise prices on their products and services. Perhaps more important, the general apprehension that has persisted in the financial markets has left bonds overvalued, by many analysts’ reckoning, and stocks comparatively cheap. There are no guarantees, of course, and stocks have already recovered substantially from their lows in 2009. Still, history has shown that assets that are significantly above or below their fair value don’t stay that way for long.
-Conrad de Aenlle