The overlong experiment with too low interest rates has been a failure. Countless people that depend on safe, stable income from their savings have been harmed with no hope of a cure.
Worse, the explanations were flawed. Additionally, their repetition over 18 years has instilled concern about the capital market’s ability to set interest rates. This misleading education is harmful and nearly impossible to rectify without a major correction.
The financial damage is easy to see, yet seldom discussed. Here are the three main periods that show the Federal Reserve’s actions. Why huge? Because those too-low interest rates damaged all holders of the $trillions of short-term deposits and investments – the expected safe places to earn a reasonable return.
When the capital market is allowed to set interest rates, “reasonable” means a rate that exceeds the inflation rate. The Fed’s lower rates were expected to help borrowers be able to do good things for the economy and employment, but they cost savers and investors lost return and purchasing power.
The pre-Covid period
Here are the two basic measures: Cumulative inflation (AKA the lost purchasing power) and the cumulative one-month US Treasury Bill return (the safest investment in the U.S.). Clearly, the Fed chairs created too-high cumulative inflation. Worse, the too-low interest rates did not come near to tracking that inflation erosion, leaving investors and savers with less than where they started and without a source of spendable payments.
The Covid period
The large Covid-spurred money creation, enlarged Federal spending deficits, and the return of 0% interest rates were all inflation drivers. However, Jerome Powell labeled the growing inflation as “temporary,” then “transitory,” so took no action. As a result, investors and savers were harmed again.
The complete period
Combine those two periods together and they compound to a significant 18-year real loss. While there were ways for some people to produce real returns, many lost purchasing power and a source of income because of the low return on their savings and safe investments.
Think of those cumulative graphs another way. Assume the assets are not stagnant accounts but are meant to serve a purpose such as for emergencies, a future major purchase, or retirement income. Without a real return, capital must be spent.
The bottom line: A Fed change is possible
The Fed chair can be changed by the President and Congress. Will the newly elected President do so? More importantly, will a new Fed chair return interest rate setting to the capital markets. It is the only way to get a fair and appropriate rate level as determined by both users and providers of capital.