Inflation is back but interest rates have not been allowed to rise. Is this the right thing to do?
Foster City, CA (PRWEB) April 19, 2010
As the Federal Reserve prepares to review its interest rate policy on April 27, a new MoneyRates.com analysis suggests there may have been steep hidden costs to the Fed's decision to keep interest rates artificially low. The analysis estimates that U.S. bank depositors may have lost $140 billion in purchasing power in the past year as a result of historically low rates. This hidden loss of $140 billion is equivalent to approximately $1,100 per U.S. household.
Since the end of 2008, the federal government has taken extraordinary measures to stem the tide of financial losses on both Wall Street and Main Street. One key component of the government's stimulus plan has been to keep interest rates low. Although this policy has been credited with reducing bank losses and spurring economic growth, it may have also cost American depositors billions.
"Everyone understands why the Fed has kept interest rates artificially low. It has been designed to stimulate the economy and bail out bank profit margins," said Richard Barrington, MoneyRates.com's personal finance expert. "However, having low interest rates is generally discussed as if it is a cost-free policy. It's not, and U.S. bank depositors have already paid billions as a result."
Barrington calculated the $140 billion purchasing power loss based on Federal Deposit Insurance Corporation (FDIC) data on U.S. bank deposits and average interest rates, as well as the U.S. Bureau of Labor Statistics' latest Consumer Price Index release for the twelve months ending in March 2010. As inflation has outpaced savings account rates, money market rates and CD rates, the purchasing power of those deposits has eroded. In real terms, the roughly $7.56 trillion deposited in U.S. banks in June 2009 has lost an estimated 1.86 percent in the past year.
The full details of Barrington's analysis is available at this article on MoneyRates.com.
The question posed by many financial analysts ahead of April 27's Federal Open Market Committee meeting is: When will the Federal Reserve increase its target interest rate? Barrington commented, "Super-low interest rates were understandable a year ago when we had seen deflation over the prior year. Now, inflation is back but interest rates have not been allowed to rise. Is this the right thing to do? As part of the discussion, people should know the true costs of keeping rates low."
While low interest rates are welcomed by those preparing to make big purchases, they penalize individuals saving for college or retirement or living on a fixed income based on interest yields. To minimize the impact of low interest rates on your assets, Barrington recommends that consumers take the time to compare rates on sites such as MoneyRates.com to make sure they are receiving the best return possible.
Meanwhile, all eyes will be on Ben Bernanke and the Federal Reserve as they prepare to reevaluate the policy of maintaining interest rates at historic lows.
MoneyRates.com has been a leading source of information on bank rates, personal finance, savings accounts and investing since 1999. The site provides the highest rates on certificates of deposits, money market accounts and high-yield savings accounts.
Richard Barrington is available for interviews on this topic and other topics relating to personal saving and investing. To interview Richard, please contact: