The Federal Reserve loves low interest rates. With rates stuck at low levels since the 2008 financial crisis, they have become the rule rather than the exception.
When the coronavirus pandemic plunged the economy into a sudden freeze, the Fed lowered its benchmark borrowing rate to near zero and purchased corporate and government securities like there is no tomorrow to curb unemployment and to stimulate the economy.
The funds rate defines the cost of lending from bank to bank through the Fed and serves as the benchmark interest rate for the economy. While low interest rates may be great for driving up sales of homes and automobiles, artificially low interest rates punish savers. Money market and certificate of deposit rates head to near zero when the Fed sets the federal funds rate at near zero.
This action disproportionately hurts senior citizens, retirees, savers, and those folks who prefer less risk. In accepting the lower yield, those people get less income, less ability to consume, a lower quality of life, and take on more risk in the stock market for which they are not prepared. Nasty choices.
Low interest rates force savers to pursue more risky investments in the hunt for yield. Ten-year Treasury Bonds offer a laughable less than 1 percent, making stocks look attractive. Thank the Fed for the stock market’s run. The rise in stocks benefits the wealthiest 1 percent or 10 percent or wherever you want to draw the line, who own more than $11 trillion of stock and mutual fund shares.
The Fed’s fundamental imperative is to strong- arm ordinary Americans to spend, spend, spend, or to invest. The notion being that if, for example, a saving account provides an interest rate that rounds to zero percent, savings makes no sense – especially when inflation is rising faster than the interest earned on a savings account. Low-risk investments don’t keep up with inflation and your money doesn’t have as much purchasing power.
The situation for savers isn’t likely to get better soon. The Fed chair has said rates would remain near zero at least through 2023, though the Fed insists it won’t take interest rates negative. The reality is that when inflation is factored in people are already experiencing negative interest rates.
When more people spend and invest the economy expands. Of course, every dollar consumers spend instead of saving amounts to several dollars that would have been available in the future if it had instead been earning interest. As low rates discourage people from saving, they must become more and more reliant on government entitlements in old age.
To put the worst construction on it, a policy of constant low interest rates is an idea that deserves to be put on a stretcher and carried back to the leisure of the theory class where it was born. You don’t have to be Philip Marlowe to know these policymakers have more than they can say grace over and are permanently out of the financial wars.
Low interest rates add to the Illiad of woes faced by ordinary Americans. The working class was in chronic crisis, alliteration aside, even before the pandemic. They work hard to make ends meet and stay out of the grasp of poverty, play by the rules, and do everything asked of them but kick extra points.
What is the right interest rate? Here’s a crazy idea: the free-market interest rate. Cut out the middleman. This is the rate you get when the Fed does not interfere in financial markets.
Don’t bet on it; the Fed wants to preserve the status quo, preserve in other words, the wealth of the One Percent and all that.
But not to worry, money isn’t everything – as long as you have enough of it.