Low rates squeeze savers. Should Fed hike them?
Low rates are supposed to stimulate the housing market, but haven't done much so far. Low rates are hurting retirees, however.
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.Skip to next paragraph
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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.
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.