Depositors in savings accounts have been asked to sacrifice
their interest rates for the sake of economic stimulus. The
question is, after four year of this, when will this sacrifice be
The answer depends on whether the economy can pull off a tricky
tight-rope act. It has to lean dangerously close to speculation,
and hope that economic fundamentals come through to balance the
economy before it goes too far and tips over. This relates to
savings accounts and other deposits, because driving bank rates
down has been such a prominent part of the
Federal Reserve's strategy
for boosting the economy. Those low rates may also be pushing the
economy further toward speculation.
Defending the Fed
Janet Yellen, Vice Chair of the Board of Governors of the
Federal Reserve and someone who has been touted as a possible
successor to Ben Bernanke, has defended the low-interest-rate
strategy on the grounds that it has increased "interest-sensitive
spending" and has
boosted the values of stocks
As much as those accomplishments could help stimulate economic
activity, they also represent things that are pushing the economy
further over to the speculative side of the tight-rope.
A speculative tilt
The increase in "interest-sensitive spending" that Yellen cites
is a polite way of saying that people are buying more with borrowed
money. This increases the speculative tilt of the economy because
consumer borrowing is already at a record high.
Meanwhile, the higher asset values of stocks and housing are
only temporary if they are based on a temporary monetary policy.
The higher those values are pushed by that policy, the more they
resemble a bubble waiting to burst.
Waiting for job growth
What the Fed acknowledges to really matter in the long run is
. Indeed, the Fed has identified getting the unemployment rate down
to 6.5 percent as a key objective of its policies, saying it is
likely to keep its low-rate approach in place until that target is
Keying the future of its interest rate strategy to the
unemployment rate is a change from the Fed's previous approach of
putting a target date on when it expects to raise rates. That
target date kept getting extended, most recently to mid-2015. The
switch to an unemployment target means that low interest rates may
continue even longer than that, if unemployment does not decline
Meanwhile, the longer the low-interest-rate policy is extended,
the greater the risk that the resulting speculation could bring
down the economy. This can be because asset bubbles eventually
collapse or because consumer borrowing hits a wall, or both. Either
way, the outcome of the tight-rope act depends on whether job
growth can fundamentally improve the economy before that happens.
That would be the best outcome for the economy -- and for CD,
savings and money market rates.
In the meantime, this leaves depositors in the same position as
the Fed -- watching the economy's tight-rope act while waiting for