Federal Reserve's near-zero interest rate is essentially an 'invisible tax'

The Federal Reserve's interest rate policy is an invisible tax that costs savers and investors roughly $350 billion a year. This tax is stifling consumption and may be causing more economic problems than it's solving.

That's the assessment of Todd E. Petzel, chief investment officer at Offit Capital Advisors, a private wealth management firm.

"If we thought this zero-interest-rate policy was lowering people's credit card bills it would be one thing but it doesn't," Petzel told the New York Times.

The cost to consumers doesn't stop there.

Despite the low rate, banks don't seem to be increasing their lending.

Savers and folks living on fixed incomes also are suffering, as are, notes the paper, underfunded pensions and crippled endowments. 

So just who is benefiting?

Uncle Sam, who otherwise would be paying higher rates on the deficit, increasing it even more.

And, of course, the banks are big winners.

But Petzel says a bit of a hike in interest rates would be good for several reasons.

It could help increase consumption and would reduce the appeal of higher-yielding and dicier investments that people have turned to as rates have dropped.

I know the hubby and I would be more inclined to visit our local stores -- I've wanted a new chair for our den for months -- if our short-term, liquid savings were earning more than a few measly dollars a month.

Unfortunately, neither the Fed nor the politicians on Capitol Hill who are beholden to the banks seem inclined to shift gears. The Fed Funds Rate has been at 0.25 percent for almost two years.

Petzel acknowledges that higher interest rates could cause some additional bank failures. "But saving a few more zombie enterprises with strong Washington voices at the expense of millions of savers' consumption may be missing the forest for the trees," he said.

What do you think? Is the almost zero percent rate good or bad for the U.S. economy? Have the low interest rates helped or hurt you personally? 

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Comments

[Gio]

In my opinion we need to stop expecting the economy to grow each year.''The Club Of Rome'' already said this 30 years ago.Why? Because we have a limited supply of raw materials on this planet, so we simply cannot keep growing. We all should settle for less.....

[Amy]

I don't think the interest rates are "simple market reality."

But I do think the Fed is keeping the rates precisely because of the effects outlined in the article as a negative.

The effect on the deficit is a big bonus but I believe the Fed would hike the rate if they saw out of control inflation on the horizon. They don't - I think they are deeply worried about deflation, which is hard to stop once it really takes hold. (The Fed rarely mentions the "d" word, which tells me how worried they are. )

I disagree that higher interest rates create an atmosphere that encourages consumption. By definition, savers are inclined to save, not spend. As you noted, you (a saver) are more inclined to spend when rates are low. So is everyone else because their loans (if they can get or want them) are super cheap.

By the way, there is another side to lending, which is demand. I'm not sure people want more loans -- it may not be quite as simple as the banks aren't lending. The down turn in lending may be in part that people aren't applying for loans, either.

Anyway, spending combats deflation by keeping prices at least steadish or slowing the fall. Can you imagine what would happen to the nearly dead housing market if rates went up even a few % points?

The good news here for people with savings and a job is that the Fed is having a hard time creating even a mild bout of inflation and is still fighting deflation. When prices go down slightly that means your savings are actually earning net 3-4% because your cash is gaining buying power. We're sitting on mostly cash, not happy, but okay with our return.

[Scott Allen]

It may seem like an invisible tax, but it's also simple market reality.

Remember, "the U.S." is US, and we a) don't really have the money to be paying higher interest rates, b) we shouldn't be borrowing any more -- that's part of how we got in the current mess.

Besides, a lot of those "dicier investments" are business startups, which will do a LOT more for the economy than a little bit of extra spending because of higher interest on short-term, liquid savings.

You say "please stop 'taxing' me cuz I'm not in debt." Couldn't I just as easily turn it around the other way and say "please don't 'tax' me cuz I don't have any savings"?