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Have you ever wished a party would last forever? The Federal Reserve may eventually pull the plug on its free money festivities, but at least for now, the Fed has given the all-clear to keep on borrowing -- and some companies and their investors couldn't be happier.
Pass the punch bowl
Yesterday, the Fed made its regular statement on interest rate and monetary policy. The bombshell in the announcement came from a change of two words, as the central bank projected its "exceptionally low levels" of interest rates through late 2014, much longer than the previous mid-2013 estimate.
Even more interesting was an unprecedented look at the individual members of the Fed's Open Market Committee and their expectations for interest rates over the next several years. Out of 17 members, 14 believe that the Fed-funds target rate will remain at its current level of 0% to 0.25% through the end of this year, with the three holdouts calling for rates between 0.5% and 1%. Next year, six members see rates rising, with the highest estimates at 2%. And by 2014, only six see the target unchanged -- but the majority see rates at 1% or less.
What that means is that barring an extremely strong economic recovery or some other unexpected event, rates are going to stay low for a good long time. That obviously has a big impact on investors, and there are both pros and cons to it.
The obvious winners are companies that directly bet on short-term rates staying lower than longer-term ones. Annaly Capital (NYSE: NLY ) and Chimera Investment (NYSE: CIM ) both made huge moves up yesterday after the Fed's announcement, as low rates help them sustain their strategies of borrowing at cheap short-term rates to invest in longer-term mortgage-backed securities that pay more interest. It's true that the Fed's move to continue its "Operation Twist" strategy of extending the maturities of its securities holdings could serve to pull long-term rates down as well. But overall, the news was good for mortgage REITs.
In addition, stocks that profit from skepticism about the fiscal discipline of governments rocketed higher. Low rates encourage more borrowing, and the U.S. government has had no shortage of spending beyond its means lately. In response, various commodities-related stocks -- notably gold and silver hybrid Central Fund of Canada (AMEX: CEF ) and silver-streaming company Silver Wheaton (NYSE: SLW ) -- soared after the announcement. And while one might think that response would be short-lived, the other thing that low rates make possible is for speculators in precious metals and other commodities to get cheap financing for their bets -- bets that can push prices of commodities higher and vastly increase the value of shares of Central Fund as well as profits for Silver Wheaton.
Squarely on the other side of this equation are savers. Already, savers have taken a huge double-hit over the past several years, as income from bonds, bank CDs, and other income-focused investments has nosedived -- in the immediate aftermath of losses on the stock side of their portfolios from the market meltdown during the financial crisis.
That in turn has pushed investors into higher-yielding investments. Dividend stocks have been a big winner, especially as the average dividend yield for S&P 500 companies has lingered above the yield on the 10-year Treasury note for a long time. Yet for those who see stocks as too risky, another haven has been corporate bonds. That's proven to be a win for big issuing companies. For instance, Ford (NYSE: F ) stands to win not only from lower rates on its outstanding bonds but also from an expected upgrade that will take the company out of junk bond status. The resulting boost will cut Ford's interest expenses dramatically, adding to profits and creating a snowball effect for shareholders.
What to do
For those who still have a long time horizon ahead of them, today's move from the Fed should provide more encouragement to get money into the stock market. It's already been painful to stay in cash, and the prospect of near-zero rates lasting for years may be too much even for disciplined savers.
Face it -- if you're going to invest in stocks, you need ones that will love you back. We've found three that we like a lot, and we've put them into The Motley Fool's latest special report along with some tips on how you can retire rich no matter what the Fed does. Grab your copy now -- it's free but only available for a limited time.