Estimated Cost of Fed Policy Swells to $635 Billion, According to New Analysis

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A MoneyRates.com study estimates that the Federal Reserve’s low-interest-rate policies have cost U.S. depositors more than half a trillion dollars in purchasing power over the last four years.

It’s not clear whether the Fed’s policy is actually working, and it’s questionable whether treating a debt crisis by encouraging more borrowing is such a good idea in the first place.

The Federal Reserve’s efforts to keep interest rates low may have cost U.S. depositors more than $120 billion in purchasing power over a 12-month period ending in March. That is the finding of a new MoneyRates.com analysis that examines how much the Fed’s low-interest-rate policies may have cost American savers, which brings the four-year estimated cost of its policies to $635 billion in lost deposits.

The study is based on the premise that Fed policy is the principal reason short-term deposit rates have trailed the rate of inflation in recent years. Historically, short-term interest rates have kept pace with or exceeded the rate of inflation. But the Fed’s unprecedented efforts to lower interest rates have helped keep deposit rates well below the rate of inflation since 2008. The study measures what impact this shortfall has had on the value of U.S. savings.

The analysis found that the rate of inflation exceeded the average money market account rate by more than 12 times for the year ending March 31, 2013. The average money market rate was chosen as an indicator because it is higher than the average savings account rate but lower than most certificate of deposit (CD) rates. As a result of the difference between money market rates and inflation rates, the estimated loss in purchasing power to American savers exceeded $100 billion for the fourth consecutive year.

The intended effect of the Fed’s low-interest-rate policies is to spur borrowing and stimulate a still-sluggish economy. But Richard Barrington, CFA, senior financial analyst for MoneyRates.com, says that these policies’ impact on savers – who have now endured years of record-low deposit interest rates – should not be ignored.

“There is a hidden cost to the Fed’s policy,” says Barrington. “It’s something that deserves to be acknowledged, because people in this country who have saved money are now being asked to sacrifice some of the value of those savings in order to bail out the economy.”

Barrington says that these losses would be easier to excuse if the Fed’s policies had inspired a more robust economic recovery.

“It’s not clear whether the Fed’s policy is actually working,” Barrington says. “And it’s questionable whether treating a debt crisis by encouraging more borrowing is such a good idea in the first place.” Barrington notes that the level of outstanding consumer debt has grown since the Great Recession and now eclipses pre-recession levels.

Barrington says the Fed should consider what impact this loss in purchasing power has had on the U.S. economy, and whether the gains that result from higher deposit rates could act as another type of economic stimulus – one that doesn’t rely on borrowing.

“Ask yourself this: Would the economy have been better off with an additional $635 billion in depositor accounts, available for spending?” Barrington says. “It seems the economy could really use that $635 billion right about now.”

For more details on the study, please see Estimated cost of Fed policy: $635 billion and counting on MoneyRates.com.

About MoneyRates.com
MoneyRates.com has been a leading source of information on bank rates, personal finance, savings accounts and investing since 1999. The site seeks to provide the highest rates on CDs, money market accounts and high-yield savings accounts. 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.
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