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| Interest Rates (Photo credit: 401(K) 2012) |
Nor, to my knowledge, have key administration officials or members of Congress. Yet interest rates close to zero are causing considerable distortions and, for many, outright harm. Think about savers who are receiving trivial returns on their bank and money-market accounts. Those returns would be negative if fund managers weren’t waiving fees. Furthermore, free checking accounts are disappearing. Banks and thrifts, facing low interest earnings, have increased the size of the required balance on checking accounts that pay no interest to $723, on average, up 23 percent in the last year.
The average fee on non-interest checking accounts jumped 25 percent to $5.48 per month, also a record. The percentage of non-interest checking accounts that are free of charges dropped to 39 percent from 76 percent in 2009.
Many savers also are deserting money-market funds for the safety of accounts covered by the Federal Deposit Insurance Corp. This is shown by the collapse in M2 velocity of money. The ratio of M2 to gross domestic product indicates that money is just sitting in accounts, despite returns that are almost zero in nominal terms and distinctly negative returns in real terms.
ECB Rate
In addition, the European Central Bank announced in July that it would cut its deposit rate for banks to zero and its benchmark lending rate to 0.75 percent. With rates this low, managers of European money-market funds totaling $60 billion have closed their funds to new investors. Many were already offering returns of less than 1 percent.
Will Americans be discouraged by low interest-rate returns and save less, or will they save more to reach lifetime goals? I believe the latter, which is one more reason why I expect the household-saving rate to climb back to more than 10 percent. At the same time, low interest returns in conjunction with volatile stock and huge losses on owner-occupied houses are forcing many vastly undersaved baby boomers to work well beyond their expected retirements; another distortion. Sure, better health care for seniors and increasing life spans are also factors, but the percentages of men and women over 65 and in the labor force are rising rapidly. And as senior citizens retain their jobs, there are fewer openings for younger people and less advancement for those in between.
The Fed intends to keep short-term interest rates close to zero through 2015, and probably longer as deleveraging keeps the economy subdued and unemployment high. So what can savers do? Hope for deflation, which will push real interest rates from negative to positive?
Banks are also suffering because of close-to-zero interest rates, even though financial institutions are paying next to nothing on deposits, which continue to swell as savers stampede for liquidity and safety. One serious problem is the relatively flat yield curve. It is anchored by zero federal funds rates on the short end and pushed down for longer maturities, at which banks normally lend, by declining Treasury yields. ... Continue to read.
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