Does the “Fed” seem as mysterious to you as it does to me? Founded in 1913 (Wikipedia: https://en.wikipedia.org/wiki/History_of_the_Federal_Reserve_System) the Fed, is a Federally created agency but owned by private entities. There is an enormous amount of information about the Fed in numerous locations, including the link above. Have you ever heard of a committee within the Fed Board of Governors who actually has much more to do with interest rates than we have ever really known?
Please remember that I am not trained as an economist nor do I have any college major that would qualify me as an academic on this topic, what I am is an interested citizen with questions and concerns.
The Federal Open Market Committee (FOMC) is a name that caught my eye and my interest. Who are they and what do they do? The FOMC is the part of the Federal Reserve System that decides what the Fed will do about interest rates and the money supply. (M1, M2: http://www.federalreserve.gov/faqs/money_12845.htm ).
It would appear on the surface that low interest rates are good for us, it has allowed us to redo our home mortgages, rid ourselves of higher interest loans and the such. But in reality, low interest rate environment means the backbone of our industry (annuity) is in peril. The end affect is our clients are receiving less than expected rates of returns, there simply is nowhere to go to earn higher interest rates that carry safety and guarantees. The current low rates are a disaster for life and health insurers that provide guaranteed products with a long duration of benefits, such as income riders. Income riders are designed to provide long term benefits, in many cases benefits that can continue for decades. With the low interest rate environments we now face, the long term income rider commitment may not be sufficient to provide the necessary needed income later in life. These products and their depend on earnings on insurance company investments. The actual pain of low interest rates may well manifest itself in those who will depend on it the most, the end user.
The margin that insurance companies are forced to operate on are extremely thin. So thin that in some situations, many annuity companies have suspended products and limited available sales volumes.
Because of the wonderful regulatory system we depend on with state department of insurance commissions, the low interest rate makes many investments with any level of risk not possible. Instead the only real options for yield are low and are crippling current investment options. Insurance companies are allowed to invest a small portion of their assets in stocks, but, mostly, they have to invest in corporate bonds, mortgages, mortgage-backed securities, government bonds and other instruments that rating analysts and insurance regulators view as being highly secure.
When you consider that the fate of our countries investment future lays in the hands of 10 powerful people, it becomes very scary. While I am sure the board of 10 (FOMC) are well education, honest, patriotic and well meaning, it still is bothersome that these 10 have such enormous influence. Their direction in interest rates affects all of us and it certainly affects those who have chosen annuities as their important and dependable income. Don’t get me wrong, insurance companies with honor their guarantees and what was promised will be delivered. My concern is simple, if a client makes the decision now, and interest rates increase, will future inflation erode the expected retirement years?
Here are the current members of the FOMC; do you recognize any of them? The links are live if you would like to look at them deeper.
Here is one interesting fact: appointed members term can be as long as 14 years, that is a long time to be in power.
- Janet L. Yellen, Board of Governors, Chair
- William C. Dudley, New York, Vice Chairman
- Lael Brainard, Board of Governors
- Charles L. Evans, Chicago
- Stanley Fischer, Board of Governors
- Jeffrey M. Lacker, Richmond
- Dennis P. Lockhart, Atlanta
- Jerome H. Powell, Board of Governors
- Daniel K. Tarullo, Board of Governors
- John C. Williams, San Francisco