Super-low interest rates haven’t done what they usually do after a recession. They haven’t ignited economic growth or revived the home market or prompted consumers to spend freely again. They have, though, caused misery for retirees and others who depend on interest income. Such income plummeted 27% from 2008 to last year. Now some economists worry that low rates might be hurting the overall economy and thus defeating the purpose of the Federal Reserve’s low-rate policies. When savers earn less, they spend less. And spending by individuals drives much of the U.S. economy.
Those concerns arise 2˝ years after the Fed pushed short-term rates to near zero, part of an effort to combat the gravest recession since the 1930s. It’s kept rates there since. The Fed is “turning the faucet, and nothing’s coming out,” says William Ford, a former president of the Federal Reserve Bank of Atlanta. “I don’t see any pluses on the plus side of the ledger. … But they’re ignoring the strong negative effect that they’re having. They’re killing savers. Retirees are earning nothing on their life savings.” The Fed this month announced plans to keep short-term rates near zero through mid-2013 unless the economy improves. And in a speech Friday, Chairman Ben Bernanke will likely lay out options for lowering long-term rates even further below the current near-record lows.
