Market Rates Insight has been tracking deposit rates for more than 25 years, and its unusual to see the kind of stagnation in short-term interest rates that we have witnessed in the past year or more. The Fed continues to maintain interest rates at near zero in hopes of stimulating investment and jump-starting economic growth. As was pointed out recently in American Banker:
“Bernanke's rationale, which reflects the prevailing view among economists, policymakers and Fed governors, is that near-zero rates provide economic stimulus because higher asset prices filter down to increased consumption, and therefore investment and job creation.
“But it's not working that way. In fact, the anemic nature of the recovery compared with those following previous recessions demonstrates the need for an urgent re-examination of the Fed's policy.”
According to the argument offered by author John Michaelson, co-founder of Imperium Partners Group LLC, an investment manager in New York, the continued near-zero interest rate damages the economy in a number of ways:
1. The wealthy are getting wealthier, by as much as $600 billion per year. According to Michaelson, the low interest rates are supposed to increase lending and stimulate job growth, but instead the Fed’s wealth transfers are rewarding shareholders and executives in the financial sector.
2. With little or no return on savings, added pressure is being placed on pension plans, retirement accounts, foundations, trusts, and other long-term investments. The result is a slower recovery since it is delaying a restoration of investor confidence.
3. There is no incentive for the job-producing middle-market companies and small businesses since, by producing a steep yield curve on government and high-quality credits, there is no incentive to lend money to smaller businesses. Why risk lending to smaller business when you can earn easy money lending to the bigger guys?
“In human terms, the Fed's policy means dairy farmers in Iowa are forgoing equipment purchases to save for retirement, charities in Manhattan are reducing services as foundations cut grants, and local governments are laying off teachers to cover pension plan deficits.”
Michaelson bases his argument on what happened in Japan in 1990, when the credit bubble burst and the Japanese brought its interest rate down to 0.25 percent. The pundits say the following decade of stagnation is the result of not bringing rates down fast enough. However, Michaelson argues that it promoted the same “anemic private consumption,” which led to failed stimulus programs and government debt.
Raising interest short-term rates will reverse the trend toward wealth accumulation and provide an incentive to start investing again, which will stimulate the economy. Raising interest rates will give banks an incentive to seek out investments closer to home that would create new jobs, and help restore confidence in their depositors. Or so the argument goes.
What’s your opinion?