Record-low interest rates fatten banks, hinder saving, investing

a banker counting profits from credit card interest rates and penalty fees

The Fed's record-low interest rate policy is boosting profits at bailed out banks at the expense of savers, investors, pensions and endowments. Thinkstock photo.

U.S. consumers are cutting debt and trying to save more money. The Federal Reserve, in an effort to keep the economy from a double-dip recession, is keeping the benchmark interest rate artificially low. Record-low interest rates are fattening bank bottom lines. The low interest rate has created a wide disparity between what financial institutions can collect from borrowers and what they have to pay depositors for their money. Some analysts are saying that while Fed monetary policies shore up the banks it bailed out with billions, they are an “invisible tax” on savers, investors, pensions and endowments.

Little reward for saving money

U.S. banks are paying savers the lowest average rates on record. A Bloomberg story on a report from Market Rate Insight said that the national average rate paid on interest for checking, savings, money market and certificates of deposit in July was 0.99 percent. The interest rate index produced by Market Rates measures rates and bonuses paid by 1,300 commercial banks and credit unions of all sizes around the U.S. The report also tracked savings rate fluctuations between Jan. 2004 and July 2010. When the national unemployment rate goes up, savings rates go down. The report concludes that when the unemployment rate goes down, interest rates on savings will go up.

Banks set up roadblocks to debt reduction

Fed monetary policy that is holding the interest rate at near zero, some believe, is rewarding banks and penalizing the average citizen. People who want to reduce debt and save more seem to have the deck stacked against them. Larry Doyle at Daily Markets writes that miniscule interest rates are squeezing people who live on fixed incomes. Savings accounts generate a negligible returns. Meanwhile, it costs credit card issuing banks next to nothing to borrow money while they continue to raise interest rates on consumer credit.

Low interest rates an invisible tax

The Fed’s interest rate policy may be causing more economic problems than it’s solving, according to Gretchen Morgenson at the New York Times. Todd E. Petzel of Offit Capital Advisors told Morgenson that the Fed’s interest rate policy is an “invisible tax” that costs savers and investors about $350 billion a year. He got that figure by starting with about $14 trillion in debt issued by the Treasury at an interest rate near zero. Rates have averaged 3 percent over time. That makes current rates too low by 2.5 points. On $14 trillion, 2.5 percent adds up to $350 billion a year in lost income to savers, investors. pensions and endowments. The money lost is more than 2 percent of gross domestic product and almost 3 percent of disposable personal income.

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