MoneyRates.com has previously detailed how people with savings accounts and other interest-bearing deposits have paid the price for the Federal Reserve’s low interest rate policies. What may be even more galling is that these policies aren’t working.
With the economic recovery clearly sputtering, it’s time to look at some possible reasons why the Fed’s low interest rate policies may not only be ineffective, but may actually be counterproductive.
- Low rates on savings accounts and other deposits take money out of the hands of healthy consumers. The idea is that low interest rates would stimulate the economy by making borrowing cheaper. However, borrowers seem intent on trying to pay down debt levels, not run them back up. So, low interest rates have been largely wasted in an environment of low lending volume, but they have taken money out of the hands of healthier consumers — those with savings accounts and other positive balances earning interest.
- Low interest rates may make bankers even more reluctant to lend. Knowing the history of interest rates and inflation, banks might well be reluctant to lend at low interest rates, for fear of finding themselves stuck with those rates for years to come.
- The Fed may have a tiger by the tail. In its effort to drive down market interest rates, the Fed has accumulated over $2 trillion in mortgage and Treasury bond holdings. It now faces the dilemma of how to unwind those positions without swamping the market. In other words, the Fed finds itself committed to policies that aren’t working.
With the Fed locked into keeping interest rates down, consumers had better shop for the best rates on savings accounts and other deposits, because that may be the only way you’ll see higher rates for a while.
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