Hidden Tax on Fixed Income Investors

If you are an investor, you have been suffering from a lack of safe, moderate yield investments.

U.S. T-Bills have been yielding less than 1/2% since late December 2008. One year bank CDs are yielding from 1/2% to 1.5%. Money market funds are paying from 1% to 1.5%. Meanwhile, the inflation rate for the past five months has averaged close to 2.25%.

These low rates on fixed income investments are due to the Federal Reserve. The Fed has been keeping the discount rate charged to member banks below 1% since late 2008. While there is some concern that they will begin to raise this rate in 2010, there is a lot of pressure for them to keep rates low. If this base rate rises, the interest rate on government debt will rise and will add to the deficit.

The bottom line is that fixed income investors -- mostly retirees -- are subsidizing part of the federal deficit. They are paying in the form of lower yields on their savings in order to keep the deficit and the debt from increasing due to higher rates.

The effect of the Fed policy of keeping rates low is like a hidden tax on fixed income investors.

For more see "The Cruelest Tax of All".

Vern