Federal Reserve's QE3 Policy Costs Seniors

November 20, 2012

In its most recent attempt to stimulate the economy, the Federal Reserve turned to its third round of quantitative easing in hopes that the economy would benefit from the acquisition of more bonds. However, the result was a lowering of interest rates, which hurts seniors the most because 10 percent of their income comes from interest on savings, says Diana Furchtgott-Roth, a senior fellow at the Manhattan Institute.

  • In 2002, the federal funds rate was around 1.75 percent.
  • In 2009, the rate declined to 0.2 percent and has been around there ever since.
  • People ages 35 to 44 receive less than 3 percent of their income from interest-rate dependent sources.
  • In contrast, people age 65 and older receive 6 percent from these sources.
  • The average earnings from interest for households headed by people age 65 and older are about $3,154 annually with the interest rate at 1 percent.
  • However, if the interest rate was just at 2 percent, the average senior would have earned $6,300 annually.

Even though seniors are expected to make less of their income from interest, other parts of their portfolios are expected to benefit from the low interest rates because things like equity investments and housing begin to rise. However, this only partly offsets the decline of income from interest rates.

Congress has yet to take action on the impending fiscal cliff, which could pose some threat to the success of the new round of quantitative easing. There has been little additional borrowing and investment by households despite the lower interest rates. This is partly due to new capital requirements, which disqualify large groups of people.

People that hold equities and commodities are likely to benefit whereas those that rely on interest payment from asset end up losing. The negative economic effects of quantitative easing are compounded by the fact that the dollar becomes weaker, which results in higher prices for commodities.

Source: Diana Furchtgott-Roth, "Why Savings are Suffering: Fed QE3 Policy Costs Seniors," Manhattan Institute, November 2012.

 

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