The Federal Reserve announced a new quantitative easing program last week that will seek to push down interest rates in the economy by purchasing $40 billion worth of mortgage-backed securities every month.
That's not great news for savers, who will likely see rates on certificates of deposit continue to fall as banks and the American economy are deluged with more cash from the Fed. In fact, Bernanke admitted as much in the press conference following the announcement:
My colleagues and I are very much aware that holders of interest-bearing assets, such as CDs, are receiving very low returns. But low interest rates also support the value of many other assets that Americans own, such as homes and businesses, large and small. In general, healthy investment returns cannot be sustained in a weak economy, and of course it is difficult to save for retirement or other goals without the income from a job. Thus, while low interest rates do impose some costs, Americans will ultimately benefit most from the healthy and growing economy that low interest rates help promote.
Bernanke has a point that most people who own CDs also have other assets that may benefit from quantitative easing. But in the short term, that's cold comfort to folks who depend on CD interest to supplement Social Security and other forms of retirement income. For them, the effects of the Fed will be felt in ever-tinier CD yield checks from banks each month and in a diminished standard of living.
But in the long term, Bernanke has a point. Even if the Fed wasn't aggressively pushing down interest rates, CD rates can only go so high in an economy as weak as the U.S. economy is right now. If the so-called QE3 succeeds in preventing a near-term economic slowdown and breathes some life into the moribund recovery, that could have a positive impact on many of the factors that historically push CD yields higher.
For example, one of the reasons CD yields are in the dumps now is that loan demand is tepid. If banks aren't making loans, they don't need as much capital, and so aren't willing to pay savers as much to use their cash. Should QE3 successfully spawn a more robust recovery, loan demand will rise and banks will be knocking on savers' doors again, offering higher CD rates.
Significant economic growth also would force the Fed to raise interest rates instead of keeping them limping along at zero percent for the next three years or so, as the Fed is currently projecting.
QE3 might represent an attempt by the Fed to sort of rip off the Band-Aid, giving savers a little more short-term pain in order to save them and the American economy from more pain later on.
What do you think? Are low CD rates hitting your standard of living? Is the Fed going all out to boost the economy a good idea?
Follow me on Twitter: @ClaesBell.