How the Fed Learned to Stop Worrying and Love 0% Rates (I’m still worried)

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In the attached article Caroline Baum at Bloomberg tries to come to terms with the Federal Reserve’s unprecedented period of ultra-low interest rates. This is the way it’s going to be she says, and we had better get used to it. The Fed has.

We could see full employment levels (assuming we ever get there) at very low rates for a long time. Any effort to raise rates might be met with a Japanese economy- like response. That is, with a shudder and  a shimmy, which will then force the Fed to lower rates back to ultra-low levels. She doesn’t seem to see the inflation monster lurking anywhere. This is a mistake, he always lurks.

She does however acknowledge the Fed’s “war on savers.” Though she doesn’t use the term.

With ultra-low rates, in real terms at this moment less than 0%, everyday people will continue to get hammered. Those who prudently save, those who used to constitute the core of the American middle class, will continue to get nothing on their money unless they take on significantly more risk than they probably should. Grandma used to get a nice little yield on her nest egg. No longer.

This situation will breed increased reliance on the state.

Sumner’s framework has implications for fiscal policy, as well. A permanent state of slow growth makes it harder for the U.S. to fulfill its promises to the elderly, not to mention invest in education and other priorities. The unemployed and underemployed will become even more reliant on the federal government. Savers will be denied the benefit of compounding interest.

The Fed might be OK with 0% and sub 0% rates. Ms. Baum may have come to terms with them. I think however that though the big banks and the politicians may like free and nearly free money, the medium and long term implications for broader society could be quite nasty.

Click here for the article.