Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

The moment when interest rates start to return to normal just got postponed - again. The Federal Reserve thinks rates will remain close to zero until the end of 2023 at the earliest. That’s a staggering 15 years after rates came crashing down in the wake of the financial crisis.

The Bank of England added its (less important) voice to the dovish message from the world’s central banks today. Rates here are also at rock bottom for the foreseeable future, with Brexit adding a further layer of uncertainty to the economic picture on this side of the pond. Japan also pointed to lower for longer rates earlier this week.

You would have had to be pretty uninterested in your investments not to have noticed by now that generating a decent income (to pay for your retirement, say) is getting harder and harder. Pockets of yield do still exist, in bonds and property, for example. But they tend to come with higher risks or worse liquidity.

There really is no such thing as a free lunch in the markets.

The Fed’s meeting this week was the most explicit guide yet to what lies ahead for investors. Fed chair Jay Powell said he did not expect the US central bank to change course until the recovery from the Covid pandemic was ‘very far’ along.

And he admitted that the Fed’s powers are limited. To kick-start growth will require action from the government too. There’s been plenty of that to date, but the bi-partisan nature of politics in America means every piece of stimulus comes only after rancorous debate in Congress. That means there probably won’t be much more to come this side of the election.

What is now obvious is that the priorities of the Fed, and other central banks, have changed from the old inflation-fighting days. The focus for now is on re-igniting growth. And if that means that inflation is allowed to exceed the 2% target for a while then so be it. Many experts think just getting to the target will be too much of a challenge.

There was some good news from the Fed this week. It forecasts the US economy will shrink by just 3.5% in 2020, less than the 6.5% decline it had pencilled in three months ago. Unemployment will also be lower by the end of the year than forecast - about 7.6%, still high but better than feared.

The less good news is that the Fed reduced its growth forecasts for the next two years - from 5% to 4% next year and from 3.5% to 3% in 2022.

The market’s reaction to the Fed’s announcement was lukewarm. Investors have become so hooked on stimulus from the central bank that any slight disappointment tends to be punished. This time, the Fed fell short of investors’ hopes for an extension of its bond-buying programme.

Shares have rallied hard and fast since March, largely on the back of central bank and government stimulus. The recent correction in technology stocks shows that there are limits to investors’ trust that the authorities will ride to the rescue.

So, what can income-seeking investors do in the current environment?

The first thing is to manage your own expectations. The days when you could expect to earn 4% or more from your savings, without dipping into your capital may not return for some time. That might mean tempering your spending so that you can manage on a lower yield or to save for a bit longer so that you can generate the same level of income from a bigger pot.

The second thing is to consider what you are prepared to give up in exchange for a decent yield. This might mean making some compromises on the security of your capital - the higher yields on some corporate bonds, for example, reflect the greater likelihood of these companies failing to meet their obligations to bond-holders.

It might also mean being willing to tie your money up for longer in return for a higher income. The FCA is consulting the market on a proposal to increase the notice period for open-ended property funds to as much as 180 days, for example.

A third consideration is whether you can look further afield to find your income. Some multi-asset income funds include a range of alternative investments like infrastructure to generate a higher income than they can find in traditional assets like shares and bonds. Investing in these assets within a well-diversified fund can mitigate some of the risks. The Fidelity Multi Asset Income Fund might be a good starting point. You can find details of this and similar income funds via the Pathfinder tool here.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Pathfinder is not a personal recommendation in respect of a particular investment. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

Topics covered

Interest rates; Investing for incomeNorth AmericaUK

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