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If you have been able to buy a house or refinance a mortgage in recent years, then congratulations. You have been a beneficiary of the Fed’s extraordinary effort to keep interest rates low. For many others though, monetary policy hasn’t been so favorable — in fact, it has cost them dearly.
Ostensibly, low interest rates are a monetary device to stimulate the economy, but more subtly they also serve to bail out banks and borrowers. Who suffers from that? Primarily savers. Whether you have a short-term savings account or a long-term retirement portfolio, low interest rates have made earning any money on your savings an uphill climb.
Recognizing the various ways low interest rates may have hurt you is not important simply so you can mutter rude things about Janet Yellen when she comes on the television. It can help you make adjustments to adapt to the low interest rate environment and the subsequent fallout that will result when rates return to more normal levels.
Here are seven bad things about low interest rates:
- Low interest rates on savings accounts. Deposit rates are closely linked to short-term Fed funds rates, so the low interest rate policy has been very clearly evident in driving savings account rates down to near zero. This is especially hard on retired folks, who typically invest their money conservatively and had grown accustomed to being able to earn some retirement income on their savings. Virtually wiping out that income for people who often don’t have another means to earn a living is a pretty harsh blow. There is no way to fully make up for the destruction of savings account income that has taken place, but it does underscore the importance of shopping around for higher-yielding savings accounts, and perhaps committing your deposits to longer-term CDs to earn a higher rate of interest.
- Low yields on bonds. Long-term Treasury bonds have been a staple of retirement plan investments, but low interest rates have helped drive their yields to below 3 percent. You might argue that the drop in interest rates created a windfall for bond investors because prices rise as yields fall, but this would be reversed with a return to more normal yield levels. In the meantime, low yields on a significant portion of retirement investment portfolios is going to make it hard to reach the return assumptions on which retirement funding is based.
- Fanning the flames of inflation. The Fed has persistently said it wants to keep interest rates low to encourage higher inflation. I can’t help thinking that encouraging higher inflation is like saying “Beetlejuice” three times — you might live to regret the help that you called for.
- A stock market on PEDs. Performance-enhancing drugs, or PEDs, inflated the statistics of professional baseball a few years back, just as it artificially inflated the physiques of the cheaters who used them. Similarly, low interest rates artificially pump up stock prices — in the long run though, all you have are companies that are more expensive, but not actually more valuable in terms of having boosted their revenue-generating power in line with the rise in stock prices.
- High checking account fees. Checking account fees have risen steadily in recent years, and free checking has become a rarity. Back when interest rates were higher, banks were happy to offer free checking just to attract deposits. With interest rates low, having those deposits on hand is not worth as much to banks, so one recourse is to raise fees. In fairness, it is worth noting that another government policy is also partly to blame for the rise in checking account fees. The Durbin amendment to the Dodd-Frank Act arbitrarily cut the fees banks could charge retailers for debit card transactions. Banks raised fees to make up for this, but don’t hold your breath waiting for retailers to pass their savings along to consumers.
- Low mortgage approval rates. The frustrating thing about the low mortgage rates of recent years is that relatively few people have been able to qualify for them due to tough lending standards. When mortgage rates are no higher than the long-term rate of inflation, it leaves little margin for defaults, so lenders are particularly wary about making loans in that situation.
- A subsidy for banks. Yes, mortgage rates came down quite a lot, and credit card rates came down a little, but neither fell as far as deposit rates. So, the rates banks pay consumers fell by more than the rates consumers pay banks. That means banks win and you lose.
Of course, low interest rates have not been entirely bad, and I can even accept the argument that they were a necessary evil in the depths of the financial crisis. However, the longer the Fed prolongs the era of low interest rates, the more it seems that savers are getting a raw deal.