Rock-bottom interest rates have pumped up stock prices, knocked down mortgage rates and supported the creation of countless unicorns in Silicon Valley. Savers, on the other hand, have been crushed by near-zero rates.
Some of those savers penalized by the Federal Reserve’s easy money policies have made their displeasure known directly to the central bank’s leaders.
Janet Yellen said Thursday that when she ran the Fed “a lot of people” correctly guessed her email address – it wasn’t very challenging to do that since it was Janet.Yellen@FRB.gov – and fired off angry messages about how the central bank was making life miserable for them.
“Some of the most disturbing notes came from people who said, ‘I worked, I played by the rules and I saved for my retirement and I have money in my bank. Do you know I’m getting absolutely nothing?’” Yellen said at the World Business Forum in New York.
The Fed dropped rates to near-zero in late 2008 as part of a massive response aimed at quelling the panic gripping the American economy and financial markets.
“It was up to us to make this the Great Recession, rather than the Great Depression,” said Yellen, who led the San Francisco Fed during the 2008 crisis.
Yet the past 11 years of extremely low interest rates has unintentionally punished savers. Money in the bank earns very little interest. Adjusted for inflation, that money often loses value.
“If you’re a saver and you’re hoping to save for retirement, this is a really miserable environment,” said Yellen, who presided over five interest rate hikes during her four-year tenure as Fed chief that ended in February 2018.
‘Not a happy calculation’ for savers
The former Fed chief explained that bottom-scraping rates mean that people seeking to retire need to accumulate substantial amounts of wealth to expect a reasonable flow of income when they stop working.
“It is not a happy calculation to make when interest rates are as low as they are,” Yellen said.
Unfortunately, Yellen doesn’t see the environment getting much better for savers. She explains that this phenomenon pre-dated the 2008 crisis and is a reflection of slow growth, low productivity and aging demographics.
“I do think this is the new normal,” Yellen said, adding that it seems that even today’s economy needs relatively low rates to support it.
The Fed reversed course this year by lowering interest rates in three consecutive meetings in a bid to offset weak global growth and crippling trade tensions. Those moves dropped the Fed’s target rate to a range of just 1.5% to 1.75%.
Jerome Powell, who replaced Yellen as Fed chief, recently signaled the central bank may keep rates steady for now.
“The Fed hung savers out to dry and Jay Powell and Co. seem intent on doing it again if needed,” Peter Boockvar, chief investment officer at Bleakley Advisory Group, wrote in a note to clients on Friday.
Trump wants negative rates
Savers have been penalized even further in Europe and Japan, where central bankers have dropped interest rates into negative territory. UBS (UBS) and Credit Suisse (CS) have both announced plans to charge wealthy clients to stash their cash.
Despite the pain that would deliver to savers and retirees, President Donald Trump has criticized the Fed for failing to follow suit.
“Who ever heard of such a thing?” Trump said during a recent speech of Germany’s ability to borrow at negative rates. “Give me some of that. Give me some of that money. I want some of that money. Our Federal Reserve doesn’t let us do it.”
Beyond the punishment for savers, Yellen warned that this era of extremely low rates has other negative side effects. She pointed to the epic pile of debt that Corporate America is sitting on, “very high” asset prices and the fact that life insurance companies and pension funds are “reaching for yield.”
“I worry that could ultimately have adverse consequences for financial stability,” Yellen said of the reach for yield.
The inequality problem
Yellen also expressed concern about America’s rising inequality gap. She noted that this is a long-term structural problem, one caused by rapid technological change and to a lesser extent globalization.
“It is a serious economic problem and social problem,” Yellen said. “It leaves all too many people with the feeling that the economy is not working for them.”
The top 1% of households now control $34.7 trillion of the nation’s wealth, according to the Federal Reserve. That’s up by 611% from the $4.88 trillion they held in 1989.
Yet the gains have been more muted for the rest of the country. The bottom 50% of families control only $2.08 trillion today, up a more modest 174% from 1989.
Yellen said inequality has serious health consequences, including rising death rates among middle-aged white Americans with less education.
“This is a tremendously disturbing phenomenon,” Yellen said.
Against that backdrop, politicians on both sides of the aisle have seized on the sense of discontent to call for radical changes to the economic system.
“Of course, a lot of the political issues we face in the United States where people begin to feel the system is not working for them are traceable to it,” Yellen said.