Fed Promises Low Interest Rates, More Cash

Low interest rates through 2015 could hurt retirees

By Scott Ross
|  Thursday, Sep 13, 2012  |  Updated 7:28 PM EDT
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Fed Promises Low Interest Rates, More Cash

AP

On Thursday, Federal Reserve Board Chairman Ben Bernanke promised low interest rates until the middle of 2015 and the purchase of $40 billion a month in mortgage-backed assets.

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The Federal Reserve on Thursday announced it intends to keep interest rates low and inject billions more into the still flagging economy.

Following a meeting of the Fed, Chairman Ben Bernanke released a statement saying the central bank planned to keep rates low through mid-2015, and will spend $40 billion a month buying up mortgage-backed securities indefinitely.

That's good news for people looking to get a mortgage, bad news for people relying on interest-bearing retirement savings and, according to one economist, a push when it comes to the unemployment rate -- even though the Fed's announcement cited slow employment growth and high unemployment among the reasons for its actions.

"I do not think that this third round of quantitative easing is going to have much of an effect on the rate of unemployment," said Martin Uribe, a professor of economics at Columbia University. "We have seen the balance sheet of the central bank increase enormously, from $800 billion to almost $3 trillion, and we haven’t seen much of an effect on the unemployment rate."

But Uribe doesn't think these moves will hurt, either. He would like to see the Fed try increasing inflation to bring down real labor costs.

"I don’t see the battery of policies the Fed is implementing right now geared toward that objective," Uribe said.

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The announcement comes as the presidential election is heating up, putting the Fed in the awkward position of appearing to play politics, which it traditionally avoids.

Wall Street responded to the news with a 200-point jump on the Dow, but GOP presidential candidate Mitt Romney's top economic advisor, Lanhee Chen, was pointedly critical.

"The Federal Reserve's announcement of a third round of quantitative easing is further confirmation that President Obama's policies have not worked," said Chen in a statement. "After four years of stagnant growth, falling incomes, rising costs, and persistently high unemployment, the American economy doesn't need more artificial and ineffective measures. We should be creating wealth, not printing dollars. As president, Mitt Romney will enact bold, pro-growth policies that lead to robust job creation, higher take-home pay, and a true economic recovery."

Republican House Whip Kevin McCarthy also took the announcement as proof of President Obama's shortcomings.

"The actions of the Federal Reserve today make one thing clear: the economic policies of the current Administration have failed miserably," said McCarthy in a statement.

While low interest rates are great for borrowers, a recent survey shows they will cause as much as a third of the country to delay retirement.

“Forty-five percent of non-retired Americans and 34 percent of retirees fear that current low interest rates may cause them to ‘outlive’ their money in retirement,” Wells Fargo said in a statement in June.

Nonetheless, Uribe thinks investors still get a decent trade off.

"In spite of an enormous increase in risk, in spite of an enormous increase in the balance sheet of the central bank, prices of U.S. government bonds have remained extremely strong. What that means is that returns have been low, but that these are very safe assets. I think many people welcome a little bit of sacrifice on the return side for the availability of something really safe."

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