Federal Reserve Chairman Ben Bernanke broke little new ground in his public statements today. In remarks made before the Economic Club of Indiana, Bernanke restated his commitment to keeping interest rates low even after the US economy has shown signs of strength. He also said that even though the Fed foresees keeping rates at exceptionally low levels until at least mid-2015, that doesn’t mean Fed officials expect the economy to actually remain weak for that long.
But for our money—no pun intended—the most interesting bit of today’s comments comes in the section where Bernanke addresses one of the common tropes of those who are dead set against any kind of quantitative easing: the it-hurts-grandma argument.
With US interest rates at levels not seen since the immediate aftermath of World War II, it’s true that savers are receiving paltry yields on their investments. Those who oppose the Fed’s use of extraordinary monetary policy have run rhetorically with that fact to argue that once again the government—in the form of the Fed—is rewarding the undeserving (people that need to borrow) while unfairly penalizing the upright and righteous savers, many of whom are sympathetic pensioners not unlike dear old gram. When you put it like that, it doesn’t sound fair, does it?
Of course, framing Fed action this way is merely a false dichotomy. Very few—if any—Americans are just savers or just borrowers. They’re usually a combination of both—for instance, someone with a mortgage who also has some money socked away. Ben Bernanke breaks down the dichotomy thusly:
Savers often wear many economic hats. Many savers are also homeowners; indeed, a family’s home may be its most important financial asset. Many savers are working, or would like to be. Some savers own businesses, and–through pension funds and 401(k) accounts–they often own stocks and other assets. The crisis and recession have led to very low interest rates, it is true, but these events have also destroyed jobs, hamstrung economic growth, and led to sharp declines in the values of many homes and businesses. What can be done to address all of these concerns simultaneously? The best and most comprehensive solution is to find ways to a stronger economy. Only a strong economy can create higher asset values and sustainably good returns for savers.
As Quartz has previously pointed out, the share of American household financial assets locked up in such interest-paying investments has been shrinking significantly in recent decades. This should not come as a huge surprise. The US has proven abysmal at saving cash for a rainy day in recent decades, even during boom times.
Bond market research firm Stone & McCarthy puts the share of household financial assets in such interest-bearing accounts at around 22% in 2010, down from more than 39% in 1989. Looking at household finances as a whole—including non-financial assets like houses—Fed researchers find less than 7% of assets are directly held in things that pay interest: transaction accounts, certificates of deposit, savings bonds, and bonds. (It is true Americans have been putting more and more money away indirectly into bonds via bond funds, however.)
The point is that the financial health of American households—and American consumer psychology—is far more dependent on path of asset prices than on interest generated from investments. And that’s why the Fed is acting, in part, to push asset prices higher.