What has that three-quarters of a trillion dollars in purchasing power bought? The results of the Fed's low-interest-rate programs are of questionable value:
- Spotty economic performance. Late last year, the real GDP growth rate slipped from 4.1 percent in the third quarter to 2.6 percent in the fourth. This follows what has become a frustrating pattern: Four and a half years into a recovery, the economy still cannot sustain any momentum.
- Too much emphasis on borrowing. The housing crisis was caused by irresponsible borrowing, and yet the Fed's response is to encourage more borrowing by lowering interest rates. While mortgage debt did decline immediately following the housing crisis (in part because of foreclosures), total mortgage debt outstanding has begun to creep up again recently. Meanwhile, total non-mortgage consumer debt has risen by more than 20 percent since 2009.
- Over-dependency on low interest rates. Low interest rates have helped both the stock market and housing recover, but there are signs that neither recovery would survive a return to more normal interest rates. In essence, those patients are still on life support.
Like any other economic decision, the Fed's low-interest-rate policies should be looked at in cost-benefit terms. So far, the net benefits appear debatable in light of the costs.
The worst of both worldsThings have been bad for depositors, to the tune of three-quarters of a trillion in lost purchasing power over the past five years. But at the same time, at least some have been able to benefit from record-low mortgage rates, which were also a result of Fed policy. Now, however, the Fed is cutting back on its program to keep long-term rates like mortgage rates down. At the same time though, it is continuing to keep short-term rates, such as deposit rates, near zero. The net result is the worst of both worlds for bank customers: It still does not pay to save money, but it now costs more to borrow it.