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Fed's quantitative easing doesn't help savers

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Tess Vigeland: I got a note from our show producer this week that we were doing a story on QE2. QE2? Queen? The boat?

Turns out she was using the new shorthand for something the Federal Reserve did this week. It's the second round of something called "quantitative easing" -- see? Q-E-2. We are such money geeks.

The Fed is pushing $600 billion into the economy to drive long-term interest rates down, make borrowing cheaper, and get us to spend more. But that is the very last thing the nation's savers need right now.

Here's Marketplace's Mitchell Hartman.


Mitchell Hartman: Ever since the financial crisis hit, the Fed's been on a relentless campaign to drive down interest rates and shock the economy back to life. That's one reason you can get a 30-year mortgage at 4 percent interest. The downside -- you can hardly earn any interest when you deposit money at the bank.

Ben Gilbert's a certified financial planner at SilverOak Advisory Group in Portland, Ore.

Ben Gilbert: From 1993 to 2008, the average one-year CD was returning just over 4.5 percent. Returns right now for CDs, a 1-year CD, is less than 1 percent usually.

So what does that really mean? Let's say you had a $10,000 CD in the mid-2000s. It may have paid $450 in interest a year. Now, it's paying $75 or less.

Your money's safe, says Gilbert. These are low-risk cash investments -- often FDIC-guaranteed -- where the principal's not at risk and it's available when you need it...

Gilbert: But it is tough to see that you're only getting 0.01 percent in your money market account, in your Schwab account or something like that, right now. That's only a dollar for every $10,000 invested.

Catherine Mann: One of the things we teach our students is the magic of compound interest.

Catherine Mann is a professor at Brandeis University and a former Fed economist. And the 'magic' she's talking about? That's when your interest is ploughed back into your savings account, adding to the principal, which then generates even more interest. Over time, it can really add up.

Mann: It's very difficult to teach that right now. There's not a lot of magic, because interest rates are so low.

Mann teaches finance to 20- and 30-somethings, who have years of saving ahead of them. It's actually their parents and grandparents who are suffering most now. Washington University economist Steve Fazzari explains.

Steve Fazzari: If you are a retired person, risk-averse, doesn't have money in the stock market, trying to finance your retirement by, say, certificates of deposit -- very safe assets -- the returns you've been getting for the last several years have been historically low.

Clodene Anderson of Framingham, Mass., sees the result of this every month in her financial statements. When the recession hit, she and her husband were on the cusp of retirement. Both lost their jobs.

Clodene Anderson: I'm only 62, my husband's 63. So that last four or five years were really going to get us set.

Now, they're cutting back on groceries, clothing, health care. The interest they earn in their retirement account is way down. And another $30,000 they've put away is stuck in a low-interest savings account.

Anderson: And that's also killing us because it's pennies. With the way that the Fed is doing their magic stuff that they're doing, we're losing money every day.

That's not really the magic the Fed is looking for. But the central bank does want people to stop socking away so much money and spend more, so the economy can grow.

Catherine Mann at Brandeis says this ends up punishing those who are trying to 'do the right thing.'

Mann: The people who now are getting religion, so to speak, and saying, 'You know, I really need to work within my means, I need to save a little bit more.' The current very low interest rates make it very unattractive to do that.

Unattractive enough, says financial planner Ben Gilbert, to make some people look outside traditional cash investments.

Gilbert: The trend lately at least seems to be putting them in emerging market bonds or higher-yield bonds, traditionally called junk bonds. And in fact, those have all historically been very risky, very volatile, relative to cash.

Gilbert tells his clients they may be able to find slightly higher returns on bank deposits by shopping online. But they shouldn't divert their cash into riskier investments, because it may not be there when they need it.

I'm Mitchell Hartman for Marketplace Money.

About the author

Mitchell Hartman is the senior reporter for Marketplace’s Entrepreneurship Desk and also covers employment.

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