Note to Fed: We’re on solid ground, time to start saving again

When the Federal Reserve elected to drop its benchmark interest rates to nearly zero in late-2008, it did so as part of a wider attempt to stave off financial ruin. The picture was gloomy, to say the least. Lehman Brothers—the country’s biggest investment bank—had filed for chapter 11 bankruptcy protection, AIG—the world’s largest insurer—needed a government bailout to survive, unemployment benefits for thousands were exhausted, credit markets were frozen, and the economy ground to a halt.  

The country as a whole needed a lift, and lowered interest rates helped incentivize spending to provide just that. Credit markets thawed, giving households and corporations easier access to vital funding, and the storm clouds hanging over the economy began to part. Flash forward nearly seven years and our country is in a much different place. The current bull market cycle is one of the strongest and longest we’ve ever seen, stocks have been at or near all-time highs throughout the year, and unemployment sits at a 15-year low.  

{mosads}The shot in the arm, however, was not without side effects to other parts of the body.  

A consequence we’ve suffered from this prolonged period of near-zero interest rates is that older Americans, who traditionally have earned around 5 percent in extra income on deposits, have seen their real returns on savings and short-term CD turn negative while the young have enjoyed an unprecedented bonanza of low-cost credit.  

Yet as Harry Truman once famously lamented, “Give me a one-handed economist. All my economists say, ‘on the one hand…on the other;’”—as economists we realize that no good policy is without pitfalls, and the stronger the economy gets, the more we must watch the other hand.  

The cost leveled on older Americans has created the disturbing trend of placing retirements and retirement plans behind the eight ball, thus calling into question whether the diminishing benefit at this juncture continues to outweigh the harm done. At CUNA Mutual Group, we’ve observed a similar theme at credit unions we serve throughout the country, which so often serve as a proxy—or a window—into the financial health of the average American.

With stocks at close to nominal and real highs—when adjusted for inflation—many customers whose better judgment would suggest prudence in the form of locking in gains by depositing their money—continue to be forced by the Fed to think twice about leaving the market. This is due to policies tailored to circumstances faced seven years ago, though. Bringing back the ability to make money again on deposits—as well as cost of credit retreating back to healthy, normal levels—makes sense from a policy standpoint and is simply the right thing to do for people who want to be responsible. 

It has to happen at some point, and there’s been a great deal of conversation that a hike will happen sooner rather than later—but the call to action is now. In her June press conference, Fed Chair Janet Yellen emphasized numerous times that the Fed will proceed in a ”data dependent” manner with regard to upcoming economic reports, and following the glowing July employment report released on 8/7, the numbers tell an abundantly clear story: We’re on solid ground and it’s time to start saving again.

Rick is the chief economist for CUNA Mutual Group, which offers insurance and protection for credit unions, employees and members; lending solutions and marketing programs.