Banking

While the Federal Reserve's accommodative monetary policy may temporarily limit returns for savers, ultimately the Fed's goal is a stronger economy that leads to higher returns for savers and investors.

Federal Reserve Governor Sarah Bloom Raskin delivered that message in a speech she delivered March 1 in Westport, Connecticut. In her remarks, Raskin explored notions that low interest rates could be hurting savers and hindering, rather than helping, the economic recovery.

As background, she recapped the nation's economic performance that led to the Fed's current policy approach. Undoubtedly, the recovery from the Great Recession of 2007–09 has been uneven, Raskin said. Though the recovery is about two and a half years old, only in mid-2011 did the level of real gross domestic product return to where it was just before the recession.

More recently, though, signs have indicated a modest upswing. Real gross domestic product increased at an annual rate of 2.5 percent in the second half of 2011, better than double the 1 percent growth in the first half. Job gains picked up starting in the fall, and in the past couple of months the unemployment rate has declined noticeably, Raskin pointed out.

Critics right in one sense, wrong on larger point
Nevertheless, the long economic slump and low interest rates will continue to have a major influence on household incomes. In one sense, Raskin said, critics have a point when they contend the Federal Reserve's accommodative monetary policy is a burden on households that rely on income from interest-bearing assets. The flow of interest income on household savings has declined about one-fourth since the recession began.

On the other hand, Raskin pointed out that many households are benefiting from low interest rates. Consumers can finance purchases of cars and other expensive items more cheaply. And many homeowners have been able to refinance their mortgages into lower-rate loans, freeing up income for other uses.

Only 7 percent of household assets earn interest
In addition, she noted, less than 7 percent of total household assets are directly held in interest-bearing investments such as transaction accounts, certificates of deposit, savings bonds, and bonds, according to the Federal Reserve's Survey of Consumer Finances. The bulk of household wealth is in stocks, retirement accounts, business equity, and real estate.

"For these other types of assets, rates of return depend primarily on the strength of the economy and how fast the economy is growing," Raskin said. "Thus, these returns should be supported, over time, by the accommodative monetary policy that we have in place."

Consumers actually saving more
As for the notion that an extended period of low interest rates will discourage savings, that does not appear to be happening. "In fact," Raskin said, "the portion of disposable income that households are saving has risen considerably since the recession began."

March 12, 2012