Wayne O'Leary

The Fed’s Great Flattening

If you’re like me, you’ve long cultivated the notion that saving has something to do with retirement. That’s what the serious thinkers in Washington have always said: save your money and don’t just depend on the government or your employer. In a time of austerity especially, the “golden years” are more than ever an individual responsibility, and personal savings, along with Social Security and a private pension, are the key to the good life, if not survival; they comprise a crucial leg of the proverbial three-legged retirement stool.

When it comes to saving, the majority of risk-averse retirees of moderate income depend on the interest their bank or credit union is willing to offer. This is why the recent decision of Chairwoman Janet Yellen’s Federal Reserve Board to forego an increase in short-term interest rates was a bombshell dropped on America’s retirement community.

Retired or nearly retired people are being told, in effect, that the Federal Reserve’s primary responsibility as steward of the economy is not to them, but to bankers, investors, and the stock market, and (by extension) to job seekers, and that they must fend for themselves. They are being told this while plans are being relentlessly hatched inside the Beltway to cut Social Security and while private-sector employers are busily slashing retirement benefits or ending them entirely. This is not the way it was supposed to be.

Yellen herself acknowledged the tradeoff (miniscule returns for savers in exchange for a supposed increase in growth and employment) in a 2014 interview: “A low-interest rate environment is a tough one for retirees who are looking to earn income in safe investments like CDs or bank deposits.” Like her predecessor, the conservative Republican Ben Bernanke, the liberal Democrat Yellen views the “financial repression” of the thrifty as an unavoidable side effect of the effort to stimulate Wall Street and succor the purported job creators by transferring money from savers to borrowers in hopes of securing a better future.

The effect on the ground is obvious to anyone with a bank account. According to Bankrate.com, the national average yield on a one-year certificate of deposit during the week of September 21-25 was 0.28%, an actual increase over the 0.26% prevailing a year ago. Wow; let the good times roll! Locking your money up longer doesn’t help. The average interest on a five-year CD, paltry enough in the spring of 2009 at 2.26%, had slid to just 0.8% by spring of last year, where it roughly remains today. Try retiring on those numbers.

What’s going on here is an unprecedented and radical attempt by the Fed to use so-called easy money as a means (in the absence of more proactive government measures) to rescue the US economy from the aftereffects of the Great Recession. Going back over half a century, the benchmark Federal Funds interest rate established by the Fed and followed by the private banking system never, until very recent times, fell below 1% and was normally much higher.

Since December 2008, however, in response to the crash and recession, the Fed’s key short-term rate, which in prior inflationary years occasionally reached into the teens, has bordered on zero; it’s not exceeded 0.25% and is currently an astonishing 0.125%. Nine years have passed since the last rate increase of any kind (June 2006), an eternity in the world of finance.

Corporate America has thereby had the benefit of virtually interest-free borrowing for close to a decade, a deliberate (and dubious) attempt by the Fed to foster recovery and full employment through bribe-induced capital investment and business expansion. The cheap-money regime established in the service of this goal has worked only up to a point. Wall Street investors have certainly gained; others not so much.

Stocks have tripled in value since their recessionary low of early 2009, an outgrowth of what many analysts consider to be an artificially inflated and overvalued market. On the other hand, official unemployment, which didn’t even reach its negative peak of 9.6% until a year after the bogus bull market began, has trended downward with agonizing slowness, despite the low-interest environment; it still exceeded 8 percent in 2012, three years after the recovery started, and has taken seven years to decline by half, remaining stubbornly above pre-recession levels.

Furthermore, underemployment, which includes part-timers in search of full-time work, still stands at over 10%, higher than before the crisis. Nor are the new full-time jobs produced in the meantime that great; overall wages have barely budged under the “recovery,” inching up an anemic 2% per year. The housing sector also remains stagnant. USA Today reports that low interest makes mortgages cheaper, but only those with excellent credit can get one. Higher interest would actually loosen restrictive lending.

Savers, of course, are being decimated by the abnormally low rates. A year ago, Alicia Munnell, director of the Center for Retirement Research at Boston College and onetime research director for the Boston Federal Reserve Bank, told Bloomberg News, “Five more years of low interest rates are going to make providing one’s self with an adequate retirement income extremely difficult.” Meanwhile, former Atlanta Fed President William Ford estimated the monetary-easing policy was altogether costing savers almost $300 billion annually.

So why the continued obsessive dedication to zero interest? Inertia at the Fed? Perhaps. But there are other reasons — or excuses. One concerns vague, unspecified fears about “global economic weakness” and a possible worldwide slowdown led by China. Another is the supposedly precarious psychological state of Wall Street, which could result in “financial market turmoil” precipitated by jittery investors, if rates are raised in the least. Paranoia about a sell-off in the stock market, stoked by panicky financial advisors and self-interested investment bankers (and apparently shared by the Fed) is the likeliest factor in the extended reign of cheap money, an unwarranted gift to parasitic investors.

One thing we know: there is an uncomfortably close and unhealthy relationship between the Fed and Wall Street. In September, Fed official William C. Dudley, president of the Federal Reserve Bank of New York, announced his opposition to raising interest rates; stocks immediately went higher. In the last analysis, that seems to be the important thing, no matter who chairs the Fed.

Wayne O’Leary is a writer in Orono, Maine, specializing in political economy. He holds a doctorate in American history and is the author of two prizewinning books.

From The Progressive Populist, November 15, 2015


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