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.