March 30, 2010

Are Two Mandates Not Enough?

I'm willing to take correction from my economic betters on this, but this concern from Charles Schwab strikes me as -- what's the economic term? -- whacked.

Today's historically low interest rates may be feeding banks' profitability, but they are financially starving our seniors.

In February 2006, when Ben Bernanke was first sworn in as chairman of the Federal Reserve, the federal-funds target rate stood at 4.5%. That same year, the average yield on a one-year certificate of deposit was 5.4%. A retiree who diligently saved for a lifetime and had amassed a nest egg of $100,000 could count on an added $5,400 in retirement income per year. That may not sound like much to the average Wall Street Journal subscriber, but for a senior on fixed incomes that extra money improved the quality of his life.

I hate to beat up on the seniors as the Obama Administration beats up on the Juniors, but is this a rational consideration for monetary policy?

I suspect not. The FOMC already suffers from the dual mandate of inflation protection and employment (Mister Phillips, call your office!) I think that badly damages the former. Trichet only has to worry about the soundness of the Euro (and Greece, and Portugal, but you get my drift...)

I don't think it is the duty of the Fed to ensure the return on fixed income securities -- am I missing something?

FOMC Posted by John Kranz at March 30, 2010 1:25 PM

I hope Rupert doesn't come after you for putting the extra words "...incomes that extra money improved the quality of his life" into the public domain without permission.

I tried reading the article for context - to see if it was being raised as a warning to investors rather than a criticism of government.

Posted by: johngalt at March 30, 2010 2:59 PM

Rupert is frightened of my influence.

I think Schwab is truly disgruntled that (let's be real, his) investors do not have ready access to a 4% + risk free vehicle.

We've taken our whacks at Helicopter Ben and The Maestro for easy money policies, but depriving seniors of adequate Money Market returns seems a stretch.

Posted by: jk at March 30, 2010 3:24 PM

Schwab also omits the rate of inflation when interest rates are at 5.4%. When considering inflation, the net yield is probably more like 1%-2%, not unlike what we have now.

Posted by: Boulder Refugee at March 30, 2010 3:37 PM | What do you think? [3]