By John Delaney
With the Federal Reserve's recent move to make historically low interest rates even lower, debate is raging over the efficacy and advisability of such actions: Will easy money lower unemployment significantly or simply cause higher inflation?
Fed Chairman Ben Bernanke has said that while the Fed is doing all it can, monetary policy offers no simple solutions to our employment challenges. I'm not an economist, but I have spent time around thousands of small-business owners and investors, and I remain skeptical -- despite the best intentions of the Fed -- that even lower interest rates can make a meaningful dent in our unemployment problem. And while the risk of inflation is important, such low interest rates pose a more immediate problem for senior citizens and middle-class families who rely on savings.
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The impact of low interest rates is broad and deep. Many Americans rely on interest income from their savings to help cover their cost of living. Americans planning for retirement 10 years ago were expecting a much higher return on their savings than they earn today. The same is true for families saving for college.
Wealthier Americans with substantial investment portfolios will lose some interest income but can afford to take more risk; that's why they invest far more in stocks and real estate than in the certificates of deposit and money-market funds on which middle-class families rely. Stock investments do well with easy money (see the 1.68 percent jump in the Dow Jones Industrial Average in the wake of the Fed's announcement); CD rates only go down. This unintended consequence of easy money exacerbates income inequality.
It's also unlikely that low interest rates will encourage corporations to invest and create jobs. U.S. corporations are sitting on more cash than ever. At this point, their investment decisions aren't tied to the cost of debt but, rather, to their perception of opportunities. It's hard to imagine that lowering their borrowing costs from 1.1 percent to 1.0 percent -- what just happened for investment-grade borrowers -- will spark corporate investment.
Low interest rates benefit individuals or investors who own or want to buy assets; in that regard, they disproportionately benefit wealthier Americans. Commercial real estate and corporations effectively rose in value on the recent Fed news, and money became cheaper for those looking to buy these assets, which, of course, unemployed Americans are unlikely to own.
Lower interest rates are often cited as a benefit to the housing market. Here, too, however, well-off Americans are more likely to gain than those who are struggling. Wealthier Americans have accrued equity in their homes more quickly than others, the St. Louis Fed reports, and probably have higher credit scores. Lower mortgage rates have allowed many of them to refinance and lower their monthly payments. But many middle-class homeowners are underwater on their mortgages and can't refinance. The Christian Science Monitor recently reported that at the end of June, 69 percent of U.S. mortgage borrowers had interest rates above 5 percent, according to CoreLogic data, and 84 percent of underwater borrowers had loans with interest rates over 5 percent.