Federal Reserve Chairman Ben Bernanke presented to Congress today the semiannual Monetary Policy Report which discusses current economic conditions, monetary policy and thoughts on fiscal policy.
Mr. Bernanke vigorously defended the Federal Reserve’s zero interest rate policy stating that the benefits of an easy money policy outweigh the “potential costs of the increased risk-taking in some financial markets.” Mr. Bernanke noted that low rates have promoted a recovery in housing markets, auto sales, job creation and consumer spending.
While expounding on the benefits of low low interest rates, Mr. Bernanke avoided discussing the devastating impact that zero rates are having on retirees and savers. Interest income on bank deposits has virtually disappeared. Banks are currently offering only a fraction of a percent interest on most deposits and there is no reason to believe that this situation will change anytime soon.
Mr. Bernanke noted that interest rates have been close to zero since December 2008 and will not be raised until the economy and labor markets improve
With unemployment well above normal levels and inflation subdued, progress toward the Federal Reserve’s mandated objectives of maximum employment and price stability has required a highly accommodative monetary policy. Under normal circumstances, policy accommodation would be provided through reductions in the FOMC’s target for the federal funds rate–the interest rate on overnight loans between banks. However, as this rate has been close to zero since December 2008, the Federal Reserve has had to use alternative policy tools.
At its December 2012 meeting, the FOMC agreed to shift to providing more explicit guidance on how it expects the policy rate to respond to economic developments. Specifically, the December postmeeting statement indicated that the current exceptionally low range for the federal funds rate “will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.”
In many ways, the Fed’s zero interest rate policy (ZIRP) has been a zero sum game. Since every loan also represents an income asset to someone else, zero interest rates have been the mechanism for transferring wealth from savers to debtors. Retirees with savings who do not want to go out on the risk curve by investing in higher yielding stocks or bonds will continue to suffer a significant loss of income.
The Fed’s zero rate interest policy is also contributing to the risk that many companies will be unable to provide promised pension benefits to workers. Pension plans rely on income from investments in long term assets to cover pension benefits. The Fed’s ZIRP policy has resulted in dramatically decreased interest payments on long term assets, resulting in huge unfunded pension plan liabilities. Companies that cannot afford to make up the shortfall in their pension funds are cutting benefits and eliminating retirement plans.
Not surprisingly, many Americans are forced to work well being the normal retirement age of 65 since they need additional income. The Census Bureau is projecting a 67% increase in the number of workers older than 65 between 2015 and 2040.
Ironically, the Fed’s policy of zero rates is hurting both the elderly and the young. For every person past 65 years old forced to work longer, there is one less job opening for younger people who are increasingly finding themselves unemployed or working as waiters after four years of college.
Despite the fact that low interest rates are beneficial in some ways, Mr. Bernanke seems oblivious to the serious financial damage a zero interest rate policy is having on the American middle class.