The Fed's low interest rate policy is designed to help borrowers, and it is coming at the expense of savers.
Foster City, CA (PRWEB) May 18, 2011
The hidden cost of the Federal Reserve’s low interest rate policies is over $170 billion in purchasing power over the last year, according to an analysis by MoneyRates.com. Sustained low rates were designed to encourage lending and stimulate the economy. However, they may have fallen short on delivering the kind of recovery the Fed intended, with many Americans drowning in debt and struggling to start or grow their savings amid accelerating inflation.
“You can debate whether the Fed’s low interest rate policy has been right or wrong, or whether it’s been effective. In any case, what needs to be made clear is the cost of their approach,” says Richard Barrington, personal finance expert for MoneyRates.com.
The Fed’s low interest rate policies, combined with inflation, have eroded any savings potential for investors looking to take a low-risk approach. Interest rates on bank deposits have fallen as inflation has gone up, making it nearly impossible for the average depositor to keep up.
“The policy should be judged in the context of the fact that it cost savers over $170 billion in purchasing power, just in the past year. Also, this is a policy designed to help borrowers, and it is coming at the expense of savers,” observes Barrington. With rates on loans at or near all-time lows, including mortgage rates, there is little incentive for banks to up the ante on CD rates, money market rates or yields on other savings vehicles. The effect of these Fed policies is not limited to individual savers. The loss of purchasing power may have cost the entire economy.
U.S. bank deposits for 2010 totaled $7.7 trillion in June 2010, according to the Federal Deposit Insurance Corporation (FDIC). The FDIC also reported that money market rates averaged between 0.22 percent and 0.31 percent from April 1, 2010 to March 31, 2011. Money market rates generally fall between short-term savings account rates and longer-term CD rates, so they were used as a reasonable representation of typical deposit account interest rates. With this data, MoneyRates.com estimated the aggregate interest earned on U.S. deposits in that year. The aggregate interest earned was adjusted with the inflation rate, according to Consumer Price Index figures from the Bureau of Labor Statistics, resulting in the $170 billion estimate of aggregate loss in purchasing power in that timeframe.
To see the full analysis, read the article at http://www.money-rates.com/news/how-fed-policy-has-cost-america-170-billion.htm.
Founded in 1999, MoneyRates.com helps consumers find the best high-yield savings account rates, money market rates and checking account and CD rates. The Wall Street Journal, The New York Times, Barron's, USA Today, SmartMoney and U.S. News and World Report regularly source MoneyRates.com for investor and consumer insights.