Last night on Freedom Watch I questioned Fed Chairman Bernanke’s ability to be self reflective after he suggested to Congress that they take care to “do no harm.” While that is great advise and all, right now the Fed is actually causing harm itself, primarily to savers with its never ending zero interest rate policy (ZIRP).
At best, Bernanke seems to think that whatever harm is caused by ZIRP, it is less than the damage we would see without the monetary stimulus. ZIRP until 2014 signals the Fed thinks the economy is still in crisis (though President Obama’s State of the Union address would suggest Treasury thinks otherwise). But the numbers suggest that ZIRP is what is causing the economy to continue in crisis mode. ZIRP has infused cash into the system, but it is just sitting in banks across America, not helping spur economic growth.
ZIRP has cut rates for savers, forcing many to move out of cash, money market funds, and CDs into stocks, which has inflated the value of equities. ZIRP has also cut rates for investors close to retirement, forcing them into riskier positions (also in equities). It may seem great that the Dow and Nasdaq are high has a kite, but the Fed is the one providing drugs for that high. ZIRP has also caused savers and investors in short-term, but low-yield bonds into long-term, higher-yield bonds that carry more risk of inflation if (and likely when) ZIRP backfires.
Simply put, ZIRP is huring the economy. We need to let interest rates move where the market takes them naturally. Backing up this view (at least on savers) is a column from MarketWatch.com’s Chuck Jaffe in how savers shouldn’t expect anything good for the next few years. He writes:
Central bankers made it clear that savers will not see any boost in money-fund returns for the foreseeable future, and can be sure that inflation will take its full bite out of their cash. So if you use a money fund for emergency savings, the dollars aren’t growing even as the cost of insurance is rising… In short, it will be at least 2015 before money-fund holders get anything approaching a meaningful return.
See his interview on Mean St. below:
Update 2/6: It appears that Charles Schawb also shares our sentiment. See this op-ed in the Wall Street Journal.