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Fed to blame for low CD rates?

By Claes Bell, CFA ·
Tuesday, March 5, 2013
Posted: 5 pm ET

Annoyed with low rates on certificates of deposit? Lawmakers are, too, and some of them are pinning it on a man many savers love to hate -- Federal Reserve Chairman Ben Bernanke.

At a Senate hearing last week on monetary policy and the economy, Bernanke had a testy exchange with Sen. Bob Corker, R-Tenn., about the effects of current Federal Reserve policy on savers.

Corker: … Just wondering if you all talk at all in your meetings about the degrading effect (Federal Reserve policy is) having on our society and how it's basically punishing people who have done the right things and throwing seniors under the bus and others that have saved money. Do you all ever talk about the longer-term degrading effect of these policies as we try to live for today?

Bernanke: … You mentioned the issue of savers. I think that is an important issue. I would just point out that if we tried to raise interest rates from, say, the current 10-year yield is 2 percent, if we tried to raise it to 3 or 4 or 5 percent while the economy was still weak, it could not be sustained. Our economy is not (strong) enough to sustain high real returns to savers. If we tried to do that, we would throw our economy back into recession and we would have lower interest rates like the Japanese do. The only way to get interest rates up for savers is to get a strong recovery, and the only way to get a strong recovery is to give adequate support to the recovery, so I don't agree with that premise.

The negative impact on savers has been a consistent criticism of the Fed's aggressive monetary easing program. But is the Fed really "throwing seniors under the bus," as Corker says?

No, says Jim Wilcox, Lowrey professor of business at the University of California Berkeley's Haas School of Business.

It's true that the years since the financial crisis have not been kind to savers, Wilcox says, and he speaks from experience. His own father is retired and derives part of his income from CD yields.

"Somebody who thought they were going to live off interest has had a tough four, five, six years now," Wilcox says.

But blaming the Fed for record low CD rates is off the mark, he says. What drives long-term returns on savings, just as it does for other types of investments, is wider economic growth.

"When you look at the data, what you'll see is, when was it that savers got higher after-tax inflation-adjusted returns on CDs? It was when the economy was really rolling along," Wilcox says.

It all comes down to supply and demand. Deposits are in demand when banks can turn around to lend them to businesses, who can in turn use them to fund profitable projects. If economic prospects are weak, fewer projects look promising, and so few companies are in the market for your dollars, Wilcox says.

Even if the Fed reversed itself to try and push up interest rates to satisfy savers, Bernanke is right that it wouldn't last long, he says. Such a move would tank the economy, forcing the Fed to cut rates again or face another deep recession in which even the most thrifty savers would suffer, he says.

Instead, the best thing the Fed can do to help savers is get the economy going again, and low rates are key to making that happen, Wilcox says.

What do you think? Is Bernanke to blame for low CD rates? How have you adjusted to terrible CD returns?

Follow me on Twitter: @ClaesBell.

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Robert M
March 18, 2013 at 12:50 pm

Whatever you do to offset low interest rates from banks DO NOT buy an annuity. Better to buy dividend-paying stocks, high-yielding bond funds, tax-free municipal bond funds, and even rent-paying real estate such as a well-managed apartment building. Just DO NOT buy an annuity, of any type, in this low-interest environment. Bernanke will not raise short-term rates until the unemployment rate is sustained at 6.5% and lower. Good luck folks!

March 15, 2013 at 5:01 pm

I believe a gradual increase in interest rates would spur economic growth. For one, individuals who are putting of big purchases (home, auto, etc) because the Fed says rates are going to be artifically low till 2015 could be pushed into purchasing these items sooner rather than later. Higher rates will create an incentive to save and invest, helping avoid households from overspending like in the mid 2000's. Individuals on fixed incomes would have more, making them less dependant on social security and more able to spend their money. It would also help the stock market because less people would want to put their $$ in bonds, remember current bond prices go down when rates increase. Finally, it actually may make Washington get serious about balancing the budget if they have to pay 4-5% on 10 year bonds that the current two, helping to stregthen the dollar and create certaining in terms of future taxes/inflation.

March 13, 2013 at 10:07 pm

And to add from what I stated in my first comment, is that I always seen or felt that the economy was growing or booming after each and every time the FED raises the interest rates UP a bit.

When someone needs a loan or mortage now, the most likely time that the demand for loans or mortages is the greatest, is when you know the rates will be going up soon, real soon.

So just say the interest rate are going up next week, and watch what happens.

March 13, 2013 at 9:55 pm

I have played the interest chase game and what the FED does for a long time. All the times that recession fears is in the news, is AFTER the Feds announces that they will cut a short term interest rate or cut some long term rate. Then after such an announcement, we all go into a recession panic mode. As a result, the recession really starts to happen. This happened after 911 and it happened when they did it in 2008. The FED then continued to cut the rates and the economy only got deeper into the recession. Everybody is now trying to hold on to what little they have left in the saving accounts. What I mean is that I can't spend the profits from my savings to help the economy.

March 11, 2013 at 10:18 pm

I don't understand how Bernanke can be so certain that higher interest rates would hinder the economy. I know he has all the credentials, but economics is after all a social science and not an exact science. Possibly if he started to raise rates, the specter of increasing rates would provide incentive for home purchases and business investments. I think the time has come, but who am I.

March 11, 2013 at 4:13 pm

If the market dictated what rates should be, I bet rates would not be where they are today. In fact,our economy would never have gotten so bad, if the market determined what rates should be. The FED got us into this by keeping rates too low for too long. It is hard to believe that 5-7 people can better determine what rates should be rather than the market.

March 10, 2013 at 11:28 pm

Let GM FAIL Save only Banks that wil pay loan off with a profit.

March 10, 2013 at 7:33 am

It's has become blatently obvious that the Feds don't give a hoot for those of us who are retired, and because we did the RIGHT THING, scrimped and saved our whole live, only to now have to go back to work at low paying jobs just to get by. What was the point of the 'American Dream", if they take it away from you after working your whole life. Throw Bernanke under the bus!

March 07, 2013 at 10:51 pm

Get rid of the Federal Reserve, that is the best way to recovery.

March 06, 2013 at 5:44 pm


It was apparent to me the minute "they" did it.

God is watching!