Is the FED’s deliberate policy of low interest rates making things worse for the states, given their significant unfunded pension obligations?
This answer to this question is from the point of view of a fixed income investor or a pension board which is disappointed at the low interest income received on bonds:
Low Interest Rates
I believe the Fed looks at everything, but the main reason they keep low rates is to encourage investment and promote business. If rates are low, people can borrow money, such as to buy a house. As long as the GDP (Gross Domestic Product) and jobs are low, then they will keeps rates low.
High Interest Rates
Let me say it a different way. If the Fed raises rates rapidly then the stock market will fall dramatically, as you saw this past May and June of 2013 and you will really lose more money and the pension plan will be getting more underfunded.
So, in conclusion, low rates are good and the Fed will slowly increase rates as they see growth in the economy and more people with jobs.
Take Action On Your Underfunded Pension
If your pension is underfunded, then get a new consultant who Sector Rotates into better managers for the right business cycle. Or hire a GTAA asset manager who Sector Rotates your investments for a better fit in industry sectors of the economy.
When bonds are favored and the stock market is doing poor such as between the year 2000 and 2012 (bonds outperformed stocks) then you should own bonds. If interest rates are rising, such as now, your Consultant or a GTAA asset manager should rotate to equities.
The S&P 500 is currently over 20% this year. It is healthy for the plan to change with the real world and not follow some mathematically formula for diversification.
The markets and business cycles change and so should your investments and investment managers.
ETFs have risk of loss which the investor must be willing to bear. This is answered for educational reasons and not intended for any recommendations.
Joe Cantu is a regular commentator for Quora on the following topics: Stock Market, Economics, Defined Benefit Pension Plans, Asset Management, Mutual Funds, Investing, and Exchange Traded Funds.