Photo: Courtesy of Bloomberg
In her latest column, NYT’s Gretchen Morgenson takes on the Fed, and its policy of keeping rates at extremely low levels, a policy which in her mind screws savers.She specifically keys off of a speech by Fed Governor Sarah Bloom Raskin, wherein she addresses this exact point: The impact of monetary policy on savers.
Raskin didn’t actually say very much. The nut of it can be boiled down to two paragraphs.
Here’s the first paragraph from Raskin that sent Morgenson in a tizzy:
This extended period of depressed levels of economic activity and low interest rates will continue to have important implications for household income flows. In particular, critics of the Federal Reserve’s accommodative monetary policy are correct that the low level of interest rates represents a strain on households who rely on income from interest-bearing assets; indeed, the flow of interest income that households earn on their savings has declined about one-fourth since the recession began. However, I would also emphasise that many households are benefiting from the low level of interest rates, and some critics of the Federal Reserve’s accommodative monetary policy seem to minimize this point. Purchases of motor vehicles and other household durables can be financed more cheaply, and in many cases, households have been able to refinance their mortgages into lower-rate loans, freeing up income for other uses.
This made Morgenson furious…
APPARENTLY, Ms. Raskin hasn’t tried to refinance a home mortgage lately. I have, and the process was labyrinthine, glacial and exasperating. Putting potential borrowers through the wringer is a bank’s prerogative, and I have no interest in returning to the days of E-Z Loans “R” Us.
Walker F. Todd, a research fellow at the American Institute for Economic Research and a former assistant general counsel and research officer at the Federal Reserve Bank of Cleveland, said Ms. Raskin should know better about the toll Fed policy is taking on savers.
“She blithely assumes that everyone who could refinance their mortgages at current interest rates has done so,” Mr. Todd said. “She ignores effects of credit scoring and outrageous fees banks are charging for those refinancings. I invite anyone who will accompany me to visit the local branch of any bank in Cleveland and to inquire about what is required exactly to be able to refinance at the currently advertised rates.”
Fair enough. It’s not easy for a lot of people to refinance these days. It’s a well-known issue that the Fed and the administration would like to address, since the ability to take advantage of cheaper loans would help a wide range of people who are hurting these days.
But Raskin made a second point, which Morgenson didn’t really rebut:
In addition, interest-bearing assets represent only a modest portion of overall household assets. According to the Federal Reserve’s Survey of Consumer Finances, less than 7 per cent of total household assets are directly held in transaction accounts, certificates of deposit, savings bonds, and bonds. Instead, the bulk of household wealth is held 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. Thus, these returns should be supported, over time, by the accommodative monetary policy that we have in place. Moreover, the Federal Reserve aims to keep inflation low and stable over time, which limits the risk to investors that high inflation will undermine the value of their savings.
Morgenson points out that the data here is old, from a pre-crisis survey, but doesn’t really argue that the basic portfolio maths has changed a lot.
People overstate the extent to which fixed income investments are the only type of financial instrument that “savers” are exposed to. Pretty much anyone with money in the stock market has been happy with how things have gone over the past few years. Housing hasn’t turned around yet, but it’s easy to imagine another scenario where the fall was much worse, if interest rates weren’t this low.
All this being said, there’s another aspect of low rates, which neither Raskin nor Morgenson addressed, but which we discussed recently here.
We live in an era in which the primary motivation of many investors is return of capital rather than return on capital. We also live in a world, where the pool of institutions than can produce “risk-free” assets has been shrinking rapidly, thanks to the collapse in the Eurozone. Also, thanks to demographics, there’s a big secular shift into risk-free assets. Thus it’s no surprise that risk-free, highly liquid assets, like US Treasuries or CDs in banks dont pay zilch. Everybody wants them! Everybody wants risk-free liquidity, and there’s a shortage of supply. No wonder there’s no yield. That’s not a Fed phenomenon.