Low interest rates may good for Wall Street, but they're hurting many on Main Street, especially those relying on retirement savings.
While low interest rates aim to stimulate the economy, they pull money out of savings in the process, which leads to weak returns on safe and accessible investments popular among retirees.
As of January, the average interest rate paid on short-term savings accounts, time deposits and money-market funds stood at 0.24 percent, one-tenth the level of late 2007 and the lowest on records dating back to 1959, according to The Wall Street Journal.
|Richard Fisher (Fed photo)
"Americans who have done everything right, have worked hard, saved their money and stayed out of debt are the ones being punished by low interest rates," says Richard Fisher, president of the Federal Reserve Bank of Dallas and a voting member of the Fed's policy-making open market committee, according to the Journal.
"That state of affairs is not sustainable for a long period of time," Fisher said.
The situation poses a delicate challenge for Fed Chairman Ben Bernanke.
The longer the central bank keeps interest rates low to stimulate the economy, the more money it pulls out of the pockets of millions of savers, the Journal reported. Among the most vulnerable are retirees, who have few options to restore lost income on investments built up over entire lifetimes.
In 2009, according to the most recent data available from the Labor Department, average annual investment income for the 24.6 million U.S. households headed by people 65 and older amounted to $2,564. That figure is down 34 percent from 2007, and is the lowest since 2003, the Journal reported.
Meanwhile, low rates are also prompting seniors to invest in more-volatile stocks.
But such investors, however, may have reason to smile.
Interest rates could rise later this year now that economic recovery is on firmer footing.
Federal Reserve Bank of Philadelphia President Charles Plosser and Richmond Federal Reserve President Jeffrey Lacker said Friday the central bank might raise interest rates before the end of the year in response to a growing economy and rising inflation. “It wouldn’t surprise me if we need to act before the end of the year,” Lacker said in a CNBC television interview. “Inflation is the bigger risk this year. That is what you have to keep your eye on.”
Meanwhile, Plosser said an increase in growth or inflation could require the Fed to begin withdrawing record monetary stimulus and possibly raise its main interest rate by the end of this year. “Signs that inflation expectations are beginning to rise or that growth rates are accelerating significantly would suggest that it is time to begin taking our foot off the accelerator and start heading for the exit ramp,” Plosser said in a speech in Harrisburg, Pa.
“It’s certainly a possibility” that the Fed will need to raise rates before the end of 2011, Plosser told reporters after the speech. “In my mind it’s definitely on the table but it will depend on how things play out over the next few months.”
Financial commentator and best-selling author Robert Wiedemer recently told Newsmax that President Barack Obama's misguided federal policies have stunted economic growth and endangered the American dream of a comfortable retirement.
"The idea with retirement is that you are supposed to save part of what you make," he says. "So, what is the government doing? They are saying, 'We don't care how much we make, we're going to spend a ton more than that and we're not going to save anything.' That sets up the mentality that you don't have to worry about this anymore."
Obama's federal policies have fueled high unemployment and are claiming new victims, financial experts say: A record number of Americans now say they doubt they'll be able to afford a comfortable retirement.
A recent survey indicates that fear is heightened among a growing swath of U.S. workers who have little savings and no long-term financial game plan. Rather than adjusting the way they save for their golden years, most are simply lowering their expectations with plans to continue working well beyond normal retirement age, according to the Employee Benefit Research Institute's annual Retirement Confidence Survey.
The report, released last month, shows 27 percent of American workers are not confident they'll have enough money to retire and live well. That's up 5 percent from last year, and marks the highest level of unease ever measured in the 21 years of the survey by EBRI, a Washington-based nonprofit research firm focused on health, savings, and retirement issues.
© 2013 Moneynews. All rights reserved.