bank rates

Report Says Fed Policy Has Cost Savers $470 Billion In Lost Interest Income

It’s hardly news that savers have taken a huge hit to their interest income since 2008’s financial crisis.

Nor is it profound to point out that no one has felt the pain more acutely than retirees and other savers who depend on interest income to help make ends meet.

But we were still surprised by the dollar figure placed on that loss by reinsurance firm Swiss Re: $470 billion from 2008 to 2013.

The figure was part of a new report on how much Swiss Re calculates the Federal Reserve’s “financial repression” policy has cost savers.

The term refers to the Fed’s decision, in the wake of this country’s worst crisis since the Great Depression, to drastically reduce what’s called the federal funds rate – the interest that commercial banks are charged to borrow money through the Fed.

In fact, the Fed dropped the rate all the way down to essentially zero in December 2008 and has held it there ever since.

As a result, banks have been able to get pretty much all of the money they need for loans for essentially nothing through the Fed, which in turn means they don’t especially need savers’ deposits.

And when they’re not very dependent on our money, we see national average interest rates like 0.28% APY on a 12-month CD today versus 3.78% APY in February 2007.

So back to Swiss Re and its estimate of these losses at almost half a trillion dollars.

The math it employs is fairly complicated, but in short Swiss Re compared the actual interest rates paid to U.S. households from 2008 through 2013 to the yields it believes savers would have earned if the Fed had followed an alternative rate-setting policy.

Specifically, they calculate that savers’ annual interest earnings would have averaged 1.7 percentage points higher, or $160 per year for households in the bottom 90% of the population.

But of course, not all impacts of low interest rates are negative, Swiss Re concedes. The most obvious plus for U.S. households is the historically low mortgage rates that homeowners have enjoyed during this period.

Swiss Re’s report also calculates that low interest rates generated an estimated $1 trillion in added wealth to households due to increased house prices and a whopping $9 trillion benefit from higher stock values.

So wouldn’t that tell us that even at half a trillion dollars (or significantly upwards of that if 2014 data had been included), the loss of interest income for savers is a small price to pay for these other, larger boosts to American households?

Perhaps, perhaps not. It might depend on who you are.

As Swiss Re points out, wealthy Americans are more likely to have a stock portfolio, and their homes are generally of higher value. So more of these benefits of Fed policy trickle up to households in the top economic tiers.

Indeed, Swiss Re suggests this is an aggravating factor to wealth inequality in our country.

Furthermore, the report calls into question whether those benefits, no matter who enjoys them, translate into much of a true boost to consumer spending, the major engine of economic growth, since stocks and real estate are not easily liquidated to cash.

“As a result, the increase in financial and housing wealth has – at best – only marginally benefited the real economy,” the report concludes.

Although Swiss Re’s report may very well stoke debate about the prudence of the Fed’s current approach to rate-setting, it’s unlikely to affect any near-term changes in Fed strategy.

At the moment, the Fed’s rate-setting committee is tentatively and cautiously approaching a decision to finally increase the Fed funds rate above zero.

The rate-setting committee last met on March 18, and, as economists and markets anticipated, it took the next official step toward raising rates by removing “patient” from its post-meeting statement.

Previously, its statements had said it would be “patient” in raising rates, and that was widely understood to mean a rate increase was at least two meetings away.

But even though cutting that word opens the door for a rate hike as early as June, Fed Chair Janet Yellen made it clear that all timing options are still on the table.

“Just because we removed the word ‘patient’ doesn’t mean we’re going to be impatient,” she said in her post-meeting news conference.

Indeed, data in the Fed’s statement indicate that many of the committee members envision a longer ramp-up of rates than was previously anticipated, with perhaps just one or two rate hikes in 2015 instead of the earlier expectation of three.

The committee continues to emphasize that its decision on timing will be based on hard data as it becomes available, and currently inflation’s lag behind the Fed’s target rate and weaker-than-desired wage growth are the indicators giving some committee members pause.

“The economy is throwing off some mixed signals at the moment,” Atlanta Fed President Dennis Lockhart, considered a centrist on the rate-setting committee, told CNBC on Thursday. “I think that’s going to be passing, or transitory. But the first quarter looks very soft.”

Then on Friday, Fed Chair Yellen told a San Francisco Fed conference that, while it was not essential to see a rise in inflation before raising rates, weakening inflation or wages would hold the central bank back from an increase.

Wall Street’s odds on when the Fed will raise rates – a probability measured and reported by CME Group FedWatch – dropped after the Fed removed “patient” from its March 18 statement, and then decreased further this week.

FedWatch currently calculates the probability of the first rate increase occurring in June to be 6%; in July, 19%; and in September, 38%.

It isn’t until the October meeting that FedWatch’s odds are better than even, at 57%.

The Fed’s rate-setting committee next meets on April 28-29. In the meantime, the inflation measure members most closely monitor, the Personal Consumption Expenditure (PCE) Index, will be released March 30, followed by a new jobs report on April 3.

Let’s hope for more “strong” and less “soft” to start putting these days of half-trillion-dollar losses for savers behind us.

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Comments (9)
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9 Existing Comments
  1. smw said:
    on March 29th at 03:25 pm

    homeowners with manufactured homes were totally cut out of the low interest rates–stiffed all the way. so there’s a hidden group of non-receivers on the “low mortgage rate” charade

  2. James K said:
    on March 29th at 05:54 pm

    And, thus, the younger folks need to save more! And, the older folks either saved enough or didn’t. Better than the alternative…a (new) Great Depression!

  3. James K said:
    on March 29th at 05:58 pm

    PS Ms Karl, one was unable to comment on your post on “Ohio Deal.” Do you think it would be helpful for a reader know if there is NCUA or other insurance covering this CU? Or, did I miss it. Thanks!

  4. Brian said:
    on March 30th at 06:52 am

    Raise interest rates??
    Let me make this clear to everyone reading this article. The FED is NEVER going to raise the rates! Get use to getting screwed on your savings. Once the big players finally realize the FED has blinked this stock market is going to crack and Gold is going to go thru the roof!
    That’s going to be the play in the next few years. NOW is a great time to start dollar cost averaging into physical gold (not the gold miner stocks that’s being manipulated stay away).

  5. Sabrina Karl said:
    on March 30th at 08:51 am

    Hi, James. All deals on Bankaholic are federally insured, either through the NCUA or the FDIC. If you see a CD here, it’s insured.

  6. James K said:
    on March 30th at 09:14 am

    Ms. Karl, the Ohio CU is not federally insured…carries private ins ASI. Again, do you think this should be disclosed in a write up on CUs? Thanks

  7. Sabrina Karl said:
    on March 30th at 12:59 pm

    James, you are correct. We goofed in overlooking this and should not have featured the deal, as it does not meet our requirement that promoted CDs be federally insured. Thank you for following our posts and for keeping us on our toes!

  8. James K said:
    on March 30th at 02:09 pm

    Your welcome. What is the corrective action plan for the future…add a checklist that requires the posting of specific insurance will do it. Otherwise what is to ensure proper action in the future.

  9. Sabrina Karl said:
    on March 30th at 03:09 pm

    James: It is already standard policy to check for FDIC or NCUA coverage. This was just a one-time error. Again, our apologies.