Federal Reserve Board Vice Chair Janet Yellen’s speech Wednesday night is being interpreted as a sign that the central bank will keep interest rates very low for at least the next two years. She cited the ailing housing market, government cutbacks and potential shocks from overseas as the reasons. “For these reasons, I anticipate that the U.S. economy will continue to recover only gradually,” she said.
In summary, I expect the economic recovery to continue — indeed, to strengthen somewhat over time. Even so, over the next several years, I anticipate that we will fall far short in achieving our maximum employment objective, and I expect inflation to remain at or below the FOMC’s longer-run goal of 2 percent… Based on such analysis, I consider a highly accommodative policy stance to be appropriate in present circumstances. But considerable uncertainty surrounds the outlook, and I remain prepared to adjust my policy views in response to incoming information. In particular, further easing actions could be warranted if the recovery proceeds at a slower-than-expected pace, while a significant acceleration in the pace of recovery could call for an earlier beginning to the process of policy firming than the FOMC currently anticipates.
So far, so pretty good. But Paul Krugman has argued that the Fed should set an inflation target of 3 percent to 4 percent. Otherwise, it risks making the same hands-tying mistakes that a professor named Bernanke identified in policy of the Bank of Japan. Also, let’s not forget that there are losers from low interest rates.
One recently wrote me:
I enjoy your commentaries, but was severely disappointed by your missing the large population of savers/retirees that did the right thing by squirreling away some savings, but now find they can’t live off of Bernanke’s 6 year 0 percent campaign. Yes, currently 0.01 percent at my brokerage money market and 0.2 percent at a certain local credit union spun off from a local airplane manufacturer.
Pre-Bernanke you could get 4 percent easily which on $100k savings meant an extra $4,000 of annual income to help the $18,000 Social Security check. Now even $1 million savings will only spin off $100 annually at the brokerage.
Clearly there is a campaign to destroy seniors since after the first 3 years of 0 percent not helping the economy, Bernanke announces “let’s do 0 percent again for 3 more years.” In addition, we all know there are structural problems with lending etc that driving rates to 0 percent won’t solve. There is nothing saying 0 percent is the right number. When rates were 5 percent, how about lowering to 3.5 percent to help the economy? When rates were 3 percent, how about lowering to 2 percent to help the economy? Surely anyone with some human decency could have picked a rate that BOTH helped the economy but ALSO left some bones on the table for the starving seniors to get some interest income? Was 2 percent too much to ask?
With 0 percent, we’re forced to spend down our principal. Once that is gone what are we to live off of? Will Bernanke open up his house and take in the poor?
One answer is that the Fed saw and sees deflation as the biggest danger to the economy. But that doesn’t help those living on fixed incomes and depending on interest-based investments. On the other hand, at least they’re not losing money.
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Today’s Econ Haiku:
Goldman “huddles” fine
Another slap on the wrist
Not the passing arm