What the Fed's 0% Interest Rate Policy Means for Investments

A few weeks ago, the United States had its credit rating downgraded again - this time by Moody's. Not surprisingly, investors panicked and the market has since been extremely volatile and seemingly without direction. In an attempt to calm the market, Fed Chairman Ben Bernanke announced that interest rates will remain low for the next 18 months. Though this temporarily boosted the market, investors remain unsure as to the long-term ramifications of the Fed's announcement. What are the effects of the Fed's nearly zero percent interest rate policies on investments?

Investors can expect to see ridiculously low rates on all bank products like savings accounts,

, and certificates of deposits. Most large brick-and-mortar banks are paying rates south of 0.25% and even the online banks like

and

are only paying 1% on savings accounts. The next year and a half, however, will be an even worse environment for those looking for interest on savings products. In other words, there will be virtually no benefit to saving and stockpiling cash in the bank for individuals or corporations.

The Federal Reserve is doing everything it can to keep bond yields low. They already have interest rates near historic lows and are considering another round of

to keep bond yields in check as well. As a result, bond investors should not expect much from Treasuries and fixed income investments. The 30-year yield remains relatively low in the 3% to 3.5% range, but could fall further still.

Though the dollar is the dominant currency and has been for years, the Fed's decision to keep interest rates low will make the United States dollar less appealing to foreign investors, and foreign currencies will become more attractive to currency investors worldwide. If Japan was not trying to debase its own currency, the yen would be a big winner. That being the case, currency investors may be forced to look to European markets.

Banks are having a difficult time regaining their footing since the crash of 2008. Regulations and economic conditions can all be blamed in part for lower earnings in the sector, but a low-interest rate environment is also hurting earnings since banks make less money. Investment income and interest income will remain low for the next few years. Moreover, it will be hard for banks to grow due to the constraints of current regulations and a flat yield curve.

A long-term low-interest rate environment is actually

. The fact that the Fed continues to keep interest rates low suggests that fears about a recession persist, and as long as there is fear in the market, there will be a flight to safety. In other words, investors are flocking in droves to the safety of gold.

will trend up as long as investors believe that the Federal Reserve is not confident about an economic bounce back. You will know that the economy is back on track when the Fed raises rates again.