How Much Have Fed Policies Cost Savers? Try $757.9 Billion

It is not the Fed's intention to hurt bank customers.

Apr 27, 2014 at 8:37AM

During its March meeting, members of the Federal Open Market Committee expressed concern that inflation might be too low. American bank customers, who have seen their deposits lose more than $750 billion in purchasing power to inflation in recent years, according to new MoneyRates.com research, may well wonder why the Fed is not more worried about the effect inflation has had on their savings.

For the past five years, MoneyRates.com has calculated the cost of the Fed's low-interest rate policies in terms of how much purchasing power bank deposits have lost to inflation as a result of today's artificially low bank rates. For each of the five years, those losses have exceeded $100 billion, and the running total now exceeding three-quarters of a trillion dollars.

A costly stimulus
It is not the Fed's intention to hurt bank customers. Low-interest rate policies have been the centerpiece of the Fed's attempts to stimulate the economy since the Great Recession. Those aggressive stimulus measures have plenty of supporters, including homeowners, stock market investors and the business community.

Amid all the support for low interest rates, what is often overlooked is that it is not a cost-free policy. Whereas bank rates have traditionally been able to earn a little more than inflation, they have consistently lagged behind inflation during this era of extraordinarily low interest rates. That means that depositors in CDs, savings accounts and money market accounts have been losing purchasing power. This lost purchasing power is the hidden cost of the Fed's policies.

A year ago, there was $9.427 trillion on deposit at U.S. banks. Over the past year, average money market rates have ranged from 0.08 percent to 0.10 percent. Inflation, meanwhile, was 1.5 percent over that same period. Because inflation grew faster than the average bank rate, consumers lost purchasing power. Adjusting that $9.427 trillion upward for interest earnings but then downward to account for the inflation rate yields a net loss in purchasing power of $122.5 billion. When this loss is added to the purchasing power losses from the previous four years, the total comes to $757.9 billion -- the effective price of the Fed's low-rate policies.

Questionable value
What has that three-quarters of a trillion dollars in purchasing power bought? The results of the Fed's low-interest rate programs are of questionable value:

  1. Spotty economic performance. Late last year, the real GDP growth rate slipped from 4.1 percent in the third quarter to 2.6 percent in the fourth. This follows what has become a frustrating pattern: Four and a half years into a recovery, the economy still cannot sustain any momentum.
  2. Too much emphasis on borrowing. The housing crisis was caused by irresponsible borrowing, and yet the Fed's response is to encourage more borrowing by lowering interest rates. While mortgage debt did decline immediately following the housing crisis (in part because of foreclosures), total mortgage debt outstanding has begun to creep up again recently. Meanwhile, total non-mortgage consumer debt has risen by more than 20 percent since 2009.
  3. Over-dependency on low interest rates. Low interest rates have helped both the stock market and housing recover, but there are signs that neither recovery would survive a return to more normal interest rates. In essence, those patients are still on life support.

Like any other economic decision, the Fed's low-interest rate policies should be looked at in cost-benefit terms. So far, the net benefits appear debatable in light of the costs.

The worst of both worlds
Things have been bad for depositors, to the tune of three-quarters of a trillion in lost purchasing power over the past five years. But at the same time, at least some have been able to benefit from record-low mortgage rates, which were also a result of Fed policy.

Now, however, the Fed is cutting back on its program to keep long-term rates like mortgage rates down. At the same time though, it is continuing to keep short-term rates, such as deposit rates, near zero. The net result is the worst of both worlds for bank customers: It still does not pay to save money, but it now costs more to borrow it.

The stealth bailout
Bailouts were largely seen as a necessary evil in the aftermath of the financial crisis. But at least with the bailouts of Wall Street firms and the auto companies, the price tag was disclosed on the front end.

Super low interest rates are effectively another form of bailout. They have helped to artificially support the banking system and the housing market. In this case though, it has been a stealth bailout, as no price tag has been disclosed. MoneyRates.com estimates that that price tag now exceeds three-quarters of a trillion dollars. When measured against the shaky results low-interest rate policies have produced, the bank depositors who have shouldered the burden of this bailout may well question if the loss has been worth it.

This article How Much Have Fed Policies Cost Savers? Try $757.9 Billion originally appeared on MoneyRates.com

Take advantage of this little-known tax "loophole"
Recent tax increases have affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report "The IRS Is Daring You to Make This Investment Now!," you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

You may also enjoy:

The best savings account rates: what savers should know

Bank fees: What's the latest?

Money market accounts: A good choice for your IRA?

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers