The cost of this stimulus is being borne very unevenly. Extremely low interest rates are a heavy tax on savers who depend on deposit accounts for income. Too often, low interest rates are discussed as if it is a cost-free policy.
Foster City, CA (PRWEB) April 30, 2012
Low deposit interest rates may have prevented U.S. depositors from collecting roughly $205 billion in interest earnings in the last 12 months, according to an analysis by MoneyRates.com. The site estimates the three-year total of lost deposit interest to be more than half a trillion dollars.
This calculation of lost interest income to bank customers quantifies the hidden cost of the Federal Reserve’s low-rate policies. The figures are based on the shortfall of short-term interest rates against inflation.
The past year’s $205 billion in interest losses is higher than the previous findings of $170 billion for the year ended March 2011 and $140 billion for the year ended March 2010. This lost income might otherwise have been spent by consumers, calling into question the Fed’s decision to keep interest rates low.
"The cost of the Fed's policy raises some important questions," says Richard Barrington, CFA, senior financial analyst for MoneyRates.com. "For one thing, would the economy be better off with that half a trillion dollars back in it -- as income going into people's pockets and available for spending?"
The question of whether a policy of low interest rates remains the best choice for stimulating a sluggish economy is even more pressing given that several years of low rates in the U.S. have yet to give way to a robust economic recovery.
"The longer the recovery takes to catch on, the more questionable the Fed policy becomes," says Barrington. "Classically, lowering interest rates stimulates borrowing and spending. But does this apply in an environment where banks are afraid to lend and borrowers are tapped out? Would more liquidity be created by letting a normal level of income flow into the hands of savers who are in a position to spend that money? Time will tell whether the Fed's insistence on clinging to their policy proves to be stubbornly brave or stubbornly foolish."
The loss of purchasing power from interest on deposits may also have disproportionately harmed certain segments of the population, such as retirees who depend on interest income from savings accounts and other deposit vehicles.
"The cost of this stimulus is being borne very unevenly,” Barrington says. “Extremely low interest rates are a heavy tax on savers who depend on deposit accounts for income. It is a form of handout to borrowers and banks. This may be necessary, but the cost and who is paying it need to be acknowledged. Too often, low interest rates are discussed as if it is a cost-free policy."
For the full analysis, please see “The high cost of the Fed’s low rates” on MoneyRates.com.
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 CDs, money market accounts and high-yield savings accounts. The Web Marketing Association awarded a Financial Services Standard of Excellence to MoneyRates.com in the 2011 WebAwards competition. MoneyRates.com is owned and operated by QuinStreet, Inc. (NASDAQ: QNST), one of the largest Internet marketing and media companies in the world. QuinStreet is committed to providing consumers and businesses with the information they need to find, research and select the products, services and brands that best meet their needs. The company is a leader in visitor-friendly marketing practices. For more information, please visit QuinStreet.com.