After 13 years of average negative real returns on savings, it is time to demand that the Fed address the effect on savers.
By Alex J. Pollock, Senior Fellow at the Mises Institute.
With inflation above 6 percent and interest rates on savings close to zero, the Federal Reserve is delivering one negative 6 percent real (inflation-adjusted) return on trillions of dollars in savings. This actually expropriates American savers’ nest eggs at a rate of 6 percent a year.
However, it is not just a problem in 2021, but an ongoing monetary policy problem that has long-standing. The Fed has delivered a negative real return on savings for more than a decade. It should discuss with the legislator what it thinks about this result and its impact on savers.
The effects of central banks̵[ads1]7; money actions permeate society and transfer wealth between different groups of people – a political act. Monetary policy can lead to consumer price inflation, as we now have, and asset price inflation, such as those we have in stocks, bonds, houses and cryptocurrencies. They can feed bubbles, which turn into busts. With negative real interest rates, they can push savers into stocks, junk bonds, houses and cryptocurrencies, temporarily inflate prices further at the same time as the risk increases significantly. They can take money from conservative savers to subsidize speculators with mortgages, thus encouraging speculation. They can transfer wealth from the people to the state through the inflation tax. They can punish thrift, wisdom and self-confidence.
Saving is crucial for long-term financial progress and for personal and family financial well-being and responsibility. However, the Federal Reserve’s policy, and that of the government in general, has subsidized and emphasized debt expansion, and unfortunately it seems to have forgotten about savings. The original theorists from the savings and loan movement, in their honor, were clear that you first had “savings,” to enable the “loans.” Our current unbalanced policy can be described instead of “savings and loans” as “loans and loans”.
As an immediate step, Congress should require the Federal Reserve to provide a formal savings impact assessment as a regular part of the Humphrey-Hawkins monetary policy and target reports. This savings effect analysis should quantify, discuss and project for the future the effects of the Fed’s guidelines on savings and savers, so that these effects can be explicitly and fairly assessed together with the other relevant factors.
The critical questions include: What impact does the Fed’s monetary policy have on savers? Who is affected? How will the Fed’s monetary policy plans affect savings and savings going forward?
Consumer price inflation year over year from October 2021 runs, as we are painfully aware, at 6.2 per cent. For the ten months of 2021 so far this year, the pace is even worse than that – an annual inflation rate of 7.5 percent.
Given that inflation, what do savers of all kinds, but especially retirees and savers with modest means, give to their savings? Basically nothing.
According to the Federal Deposit Insurance Corporation’s national interest rate report on October 18, 2021, the national average interest rate on a savings account was a trivial 0.06 percent. On money market deposit accounts, it was 0.08 percent; on a three-month deposit certificate, 0.06 percent; on six-month CDs, 0.09 percent; at six-month treasury bill, 0.05 percent; and if you committed your money to five years, a majestic CD rate of 0.27 percent.
I estimate, as shown in the table below, that monetary policy since 2008 has cost U.S. savers around $ 4 trillion.
The table assumes that savers can invest in six-month treasury bills, and then subtract the corresponding inflation rate from their average interest rate, and give savers the real interest rate. This is on average quite negative for these years. I calculate the amount of savings that are effectively expropriated by negative real interest rates. Then I compare the actual real interest rates with an estimate of the normal real interest rate for each year, based on the fifty-year average of the real interest rates from 1958 to 2007. This gives us the gap the Federal Reserve has created between the actual real interest rates. rates over the years since 2008 and what would have been historically normal rates. This gap is multiplied by household savings, which shows us in arithmetic the total gap in dollars.
* Total household savings consist of time and savings deposits, money market fund units and treasury bills
** Normal real interest rate is the average of 6-month treasury exchange return minus CPI inflation, 1958-2007, = 1.66%
Sources: Federal Reserve Statistical Release, Financial Accounts of the United States – Z.1, US Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: All Items in US City Average, & Board of Governors of the Federal Reserve System (US )), 6-month treasury bill Secondary market interest rate
To repeat the answer: $ 4 trillion for savers.
Through a regular impact assessment for savers, the Federal Reserve should have substantial discussions with Congress on how monetary policy affects savings, what the resulting real return to savers is, who the resulting winners and losers are, what the options are and how its plans will affect savers going forward.
After thirteen years of average negative real returns on conservative savings, it is time to demand that the Federal Reserve address its impact on savers. By Alex J. Pollock, Senior Fellow at the Mises Institute.
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