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Tags: Economy | Low Rates

Low Rates Squeeze Savers and May Hold Back Economy

Thursday, 25 August 2011 06:24 AM EDT

Super-low interest rates haven't done what they usually do after a recession. They haven't ignited economic growth or revived the home market or persuaded consumers to spend freely again.

They have, though, caused misery for retirees and others who depend on interest income. Such income plummeted 27 percent from 2008 to last year.

Now, some economists worry that low rates might be hurting the economy itself — defeating the purpose of the Federal Reserve's low-rate policies. When savers earn less, they spend less. And spending by individuals drives about 70 percent of the U.S. economy.

Those concerns arise 2½ years after the Fed pushed short-term rates to near zero, part of an effort to combat the gravest recession since the 1930s. It's kept rates there since.

The Fed is "turning the faucet, and nothing's coming out," says William Ford, a former president of the Federal Reserve Bank of Atlanta. "I don't see any pluses on the plus side of the ledger ... But they're ignoring the strong negative effect that they're having. They're killing savers. Retirees are earning nothing on their life savings."

The Fed this month announced plans to keep short-term rates near zero through mid-2013 unless the economy improves. And in a speech Friday, Chairman Ben Bernanke will likely lay out options for lowering long-term rates even further below the current near-record lows.

One option is a third round of Treasury bond purchases by the Fed. Such purchases would be intended to nudge rates even lower, to encourage spending and borrowing and raise stock prices. But additional rate declines would likely also further drive down rates on savings vehicles.

Low rates have already hurt retirees and other savers. Savings accounts, on average, are yielding 0.15 percent, 1-year CDs 1.15 percent and even 5-year Treasury notes only 1 percent.

Americans' total interest income dropped from $1.38 trillion in 2008 to $1.01 trillion in 2010, according to the federal Bureau of Economic Analysis. That time span has coincided with a period in which the Fed kept its main interest-rate lever, the federal funds rate, at a record low of zero to 0.25 percent.

In Fort Lauderdale, Fla., Julie Moscove, 69, has watched her monthly interest income drop from more than $2,000 a few years ago to perhaps $400 now.

"It's ridiculous," says Moscove, who's semi-retired but still runs the Tattoo-A-Pet registry business. "I cut coupons now."

Moscove has little appetite for risk after having been burned by stocks when the dot-com boom went bust a decade ago. So she's resigned to accepting negligible returns just to keep her money safe.

Pension funds are also being hurt. Largely because of low rates, the nation's 100 biggest pension funds were $254 billion short of what they need to meet obligations to retirees at the end of July. That was up from a $186 billion shortfall in June, according to the consulting firm Milliman.

Low rates are a tool that Fed officials have long used to boost weak economies. In recessions past, when the Fed slashed rates, a drop in borrowing costs led companies to hire and expand.

More people bought homes, too. Stronger home sales encouraged builders to erect houses and hire construction workers. They also increased consumer spending as new homeowners bought appliances and furniture. That's why a housing recovery normally energizes the entire economy.

It hasn't worked that way this time. This recession followed a devastating financial crisis that damaged the banking system and made lower interest rates less effective.

It's true the Fed's easy-money policies may have kept the economy from getting worse. And they might have prevented a dangerous deflationary spiral of falling prices, wages and profits — a threat that had worried Bernanke a year ago.

But super-low short-term rates and two rounds of Treasury bond purchases haven't delivered a robust recovery. The Dow Jones industrial average is down 11 percent since July 21, partly on fears that the economy might slip back into a recession.

Businesses aren't feeling expansive, not even with the prime lending rate for banks' best business borrowers at a low 3.25 percent. Corporations are sitting on nearly $2 trillion in cash. They're waiting to be convinced that the economy is improving before they'll spend much of it.

And consumers are still too intent on paying down the debts they piled up through the mid-2000s to go on many credit card-charged spending sprees.

Even with mortgage rates near record lows, home sales remain weak. The average sales price of an existing home has dropped 30 percent since before the recession.

Many homeowners can't trade up to a more expensive house because they can't sell their homes. They owe more on their mortgages than their houses are worth.

New homeowners might not qualify for mortgages because banks have tightened lending standards after absorbing loan losses during the recession. And a vast inventory of foreclosed homes will likely depress housing prices for years.

"You're trying to stimulate an industry that has so much garbage sitting on top of it that it won't work," says Ford, now a finance professor at Middle Tennessee State University.

The bottom line, Fed critics say, is that super-low rates aren't stimulating the economy enough to make the financial pain to savers worthwhile.

"Someone is paying a price for ultra-low interest rates: the patient and uncomplaining saver," writes Raghuram Rajan, a University of Chicago finance professor.

© Copyright 2024 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Super-low interest rates haven't done what they usually do after a recession. They haven't ignited economic growth or revived the home market or persuaded consumers to spend freely again.They have, though, caused misery for retirees and others who depend on interest income....
Economy,Low Rates
Thursday, 25 August 2011 06:24 AM
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