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Fed’s medicine has some negative side effects

Posted by Jamie Downey  November 12, 2010 09:29 AM

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About three weeks ago, my wife and I refinanced our home for the second time in 18 months. We have shaved about $460 per month off our original mortgage payment. We are definitely a benefactor of the Federal Reserve current interest rate policy. No sane bank would ever provide my wife and me a 30 year loan at 4.25 percent. As of Wednesday, a 30 year US Treasury bond was yielding 4.25 percent. Consequently, the US Government is borrowing money at the same rate that we are borrowing money. Not that we are bad credit risks, we just are not as good as the US government.

Last week the Federal Reserve announced that it will purchase an additional $600 billion of Treasuries in an attempt to further reduce interest rates. Maybe my wife and I will hit pay dirt again and refinance our home at an even lower rate. While these low interest rates have been a blessing to us, they have been a curse to others. Those cursed in the current environment are primarily seniors and savers.

My Grandmother was the model of fiscal prudence and responsibility. She lived through the Great Depression and knew how to stretch and save her money. After retiring, she lived on a modest Social Security annuity and her savings. All of her savings were in CD’s. Like many elders, she preferred not to tap into the principal of her savings and lived on the interest that it earned. After passing this summer, most of her CD’s were earning interest at rates considerably less than one percent. She could no longer live solely on the interest and was dipping into the principal. She was being squeezed and had to cut back where she could. I know others are being squeezed as well.

As if this is not bad enough for seniors, the Federal Reserve wants to INCREASE the rate of inflation. So in addition to earning no interest on their savings, their savings accounts will actually be worth less, i.e. your $100,000 CD will only buy you $97,000 worth of goods next year.

What is the rationale to redistribute money to borrowers (like myself) from savers (like my Grandmother)? This is the net effect of the Federal Reserve’s policy. I save $460 per month and my Grandmother probably gave up a similar size stream of income each month. Is this the new era of responsibility that President Obama was talking about when he ran for President? Are the savers no longer the responsible party and the borrowers are? Maybe my wife and I will go run up our credit cards on frivolous trinkets and become even more responsible. Instead of saving for the kids college (and earning no interest), we will take a vacation.

This blog is not written or edited by Boston.com or the Boston Globe.
The author is solely responsible for the content.

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Local finance professionals share insights and advice on issues such as budgeting, managing debt, and retirement planning.

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D. Abraham Ringer is a CERTIFIED FINANCIAL PLANNER practitioner and a Financial Adviser with Morgan Stanley Global Wealth Management in Boston. He is registered in MA, NH, NY and several other states to which his articles are directed. For more information please visit www.morganstanleyfa.com/ringer
Financial Planning Association™ of Massachusetts has 900 members who specialize in the financial planning process. Many of its members engage in philanthropic pro bono work in their communities, recommend legislation, elevate public awareness, promote financial literacy, and advocate for sound economic and tax policies.
Odysseas Papadimitriou is the founder of CardHub.com, a credit card and gift card marketplace, and WalletHub.com, a personal finance site. He has more than 13 years of experience in the personal finance industry, and previously served as senior director at Capital One.

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