During its March meeting, members of the Federal Open Market Committee expressed concern that inflation might be too low. American bank customers, who have seen their deposits lose more than $750 billion in purchasing power to inflation in recent years, according to new MoneyRates.com research, may well wonder why the Fed is not more worried about the effect inflation has had on their savings. For the past five years, MoneyRates.com has calculated the cost of the Fed's low-interest-rate policies in terms of how much purchasing power bank deposits have lost to inflation as a result of today's artificially low bank rates. For each of the five years, those losses have exceeded $100 billion, and the running total now exceeding three-quarters of a trillion dollars. A costly stimulus
It is not the Fed's intention to hurt bank customers. Low-interest-rate policies have been the centerpiece of the Fed's attempts to stimulate the economy since the Great Recession. Those aggressive stimulus measures have plenty of supporters, including homeowners, stock market investors and the business community. Amid all the support for low interest rates, what is often overlooked is that it is not a cost-free policy. Whereas bank rates have traditionally been able to earn a little more than inflation, they have consistently lagged behind inflation during this era of extraordinarily low interest rates. That means that depositors in CDs, savings accounts and money market accounts have been losing purchasing power. This lost purchasing power is the hidden cost of the Fed's policies. A year ago, there was $9.427 trillion on deposit at U.S. banks. Over the past year, average money market rates have ranged from 0.08 percent to 0.10 percent. Inflation, meanwhile, was 1.5 percent over that same period. Because inflation grew faster than the average bank rate, consumers lost purchasing power. Adjusting that $9.427 trillion upward for interest earnings but then downward to account for the inflation rate yields a net loss in purchasing power of $122.5 billion. When this loss is added to the purchasing power losses from the previous four years, the total comes to $757.9 billion -- the effective price of the Fed's low-rate policies.
Questionable valueWhat 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.
The stealth bailout