Despite months of anticipation and speculating, the Federal Reserve chose not to raise interest rates in September citing low inflation and global economic weakness.
And so the era of ultra-easy, crisis-era monetary policy goes on.
One banking CEO, however, thinks it was a huge mistake and the choice is hurting the American economy.
According to PNC Group CEO William Demchak, the Federal Reserve’s zero interest rate policy is actually hurting the long-term health of the US economy.
“We are basically in the extreme bailing out the younger generation and putting it on the backs of retirees with this interest rate policy, and I continue to think it’s wrong,” said Demchak in a quarterly earnings call Wednesday.
Demchak explained that the low interest rates are encouraging irresponsible risk-takers while punishing responsible savers.
“I think that in effect the destruction of retirement income for retirees, we have trained people their whole lives that once they retire and they are supposed to change their 401(k) and put it into kind of a less risky fixed rate investment portfolio, today they can’t do it, they can’t live on it,” said Demchak.
“So we are stretching out the need for people to work, we are destroying their ability to retire with the savings they have today.”
With the interest rates at zero, retiring and living off of savings is more difficult since the interest that would help supplement a retirees nest egg simply isn’t there.
He said that in addition to hurting retirees, it doesn’t make sense because the economic impact of the anticipated 0.25% rate raise from the Fed wouldn’t matter much to companies or people. Here’s Demchak:
“There is not a single CFO, CEO person that I’ve met anywhere inside of this country who has suggested they’re going to change their investment decisions or purchasing behaviour as a function of 25 basis point change in interest rates. I personally believe that the practical impact on the economy of raising rates back to a more normalized level, figure out what that is, is a lot less than what people are assuming it is because I think they were pushing on a string when they dropped rates from the 1% level down to zero.”
In fact, Demchak sees the continued zero-rate environment as dragging down the economy more than anything.
“I think the fact, I think there was something to this general notion that by choosing not to move rates they were signalling a real lack of confidence in the economy, which is playing out now in the sentiment you are seeing from surveys with consumers and corporations, and confidence matters,” he said.
While there seems to be some genuine concern behind Demchak’s statements, there is also an incentive for him to want the Fed to move because it would help PNC’s business, which is the 10th largest American bank in terms of asset holdings with over $US354 billion managed by the company.
With the Fed’s interest rates so low, that means that the company has had lower net interest income, or NII.
“I was pleased to see both core and reported NII up this quarter but was disappointed at the Fed’s decision to leave rates unchanged at the end of September,” he said. “This delay and the subsequent dubious statements from various Fed governors will at best delay our ability to grow NII materially in the future.”
According to Robert Reilly, the company’s CFO, the expectation is that the Fed would raise rates in December. And for Demchak, it would make a lot of sense if they did.
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