Besides Bernanke, Charlie Evans of the Chicago Fed is probably the most important FOMC member to listen to these days. That’s because he’s the most aggressive dove, and the person most eager to see the Fed follow a rule in which they allow inflation to grow more than normal until employment is improved, a notion that’s not that different from what Bernanke announced a couple of weeks ago.
He was on CNBC this morning, and at one point, Becky Quick asked him a fairly common question: “What do you say to savers who are getting squeezed by low interest rates?”
His response, which you can see at the 4:40 mark in the video below was basically: “Savers would be better off if interest rates were higher … the question is: What do you mean by higher interest rates?”
So naturally, this got him mockery from the likes of ZeroHedge and others. After all, a dovish Fed guy asking what the definition of high interest rates — when low interest rates seem to the the bane of savers — does seem at first blush to be the definition of out-of-touch.
But actually, Evans’ point of clarification on this issue is soooo important, since it gets at one of the biggest confusions about monetary policy and interest rates today.
There’s this idea out there that low interest rates = loose money, and that if the Fed were to “tighten” then interest rates would be higher. But a little memory of history quickly debunks this.
Think back to the late ’70s, when long-term interest rates were in the double digits. Was Fed policy loose or tight? Loose, obviously. When Volcker came into office, and started tightening policy, what happened? Interest rates started to fall. Low and falling rates is an artifact of tight policy. Rising rates are an artifact of loose policy, which is what the Fed is currently trying to pursue, to limited effect. If you want higher rates for savers, the only way out is to do whatever you can to boost the economy, which itself will cause interest rates to rise.
If you want to screw over savers, do nothing, let deflation rule the day, and watch interest rates collapse (as they did during the financial crisis).
Evans’ simple point is so crucial, since people get this backwards all the time. Letting deflation happen is how you kill interest rates. Boosting the economy is the best thing that could happen to savers.
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