Why Savings Are Suffering: Fed QE3 Policy Costs Seniors

Introduction

With U.S. and global growth slowing, Federal Reserve chairman Ben Bernanke is pumping more money into the banking system in an attempt to rescue the economy.

This has lowered interest rates, reducing the return from savings. Seniors are particularly hard-hit, because 10 percent of their income comes from interest on savings.

If interest rates were 2 percent rather than 1 percent, the average senior would have an additional $3,200 in income. If rates were 4 percent, the senior would have an additional $9,500. If rates were 6 percent, the senior would earn $15,800 more per year.

Naturally, other parts of seniors’ portfolios are positively affected by low interest rates, so the amounts above are not a net gain. For instance, low rates causes the value of equity investments and housing to rise, so seniors’ portfolios become more valuable.

The Analysis

Chairman Bernanke has led the Federal Open Market Committee to QE3, a decision to buy more bonds, in the hope that a further diminution of already record-low interest rates will have a tonic effect on spending. But it is unlikely that such an action will have any palpable effect on the economy after QE1, QE2, and Operation Twist.

Quantitative easing could work in theory if interest rates were high and in coordination with fiscal policy. But neither of these conditions is true now.

Read More at manhattan-institute.org. By Diana Furchtgoff-Roth.