How low interest rates affect savers

interest rates paper

TEXT OF INTERVIEW

Tess Vigeland: So here's one of the common questions we get from you: Should I do X or should I do Y, based on possible changes in interest rates. And when will those changes happen? To which our standard reply is -- nobody, including us, knows what the Fed is going to do with interest rates.

But this week Chairman Ben Bernanke telegraphed the Fed's intentions in a report to Congress, and it looks like rates are going to stay low for at least the next several months. Joining us for some analysis is our Washington bureau chief John Dimsdale. Hey John.

John Dimsdale: Hello, Tess.

Vigeland: Now, I want to start off by asking you to explain something to me -- and I hope you can get inside the head of economists and the Fed chairman...

Dimsdale: I'm sure that's real easy.

Vigeland: Right, good luck with that. But you know, I feel like I've been hearing for months now that no doubt about it, the Fed will start raising interest rates soon, probably in March or April. Well, as of this week, not going to happen.

Dimsdale: Yeah, they're still telegraphing that it's going to be an extended period before they raise rates. You know, unemployment is still really high, the housing market's not improving and inflation is nowhere to be seen, which gives the Fed room to keep interest rates low for a while.

Vigeland: All right, so obviously, this is good news for anyone who wants to buy something on credit, any borrowers. But boy, for savers, the news just continues to be horrible.

Dimsdale: Yeah. I mean, when banks can get money cheap from the central bank, essentially, they're getting these loans for free right now. They have no need to attract depositors' money, so they're not setting up any kind of an attractive interest rate.

Vigeland: Yeah. It does make you wonder why people are saving more. We do hear that we Americans are putting away a little more money every month, but why do that when the returns are so low?

Dimsdale: Yeah. I checked in with Jeffrey Kosnett, he's the senior editor at Kiplinger's Personal Finance magazine. And he says, we're essentially talking about two kinds of savers: One are the new ones to the saving discipline. They're either unemployed or worried about it and that fear of being out of work is forcing them to reduce their debt, try to set aside some money for a rainy day. Kosnett says those people are less interested in what return they're getting on their savings, as long as they have quick access to it.

Jeffrey Kosnett: So these very small movements in interest rates that are such great symbolic importance to bankers and in Wall Street, really make very little difference at all for the regular, ordinary American household that has some money in a savings account.

Dimsdale: But the second category, they're the long-term savers. They already have a nest egg, and they may be living off the interest that they can earn on what they have.

Vigeland: So, what can folks do about these low returns that they're getting at all these safe havens -- insured bank accounts, even CDs don't get you anything these days. Anywhere where you can get bang for your buck?

Dimsdale: Well, there are some relatively good investments in state and local government bonds, municipal bonds that are being floated for some of this stimulus rebuilding -- they're called "Build America Bonds." Or maybe some conservative mutual funds that invest in safe companies, like the big ones Johnson & Johnson, AT&T, General Electric. Financial planners say that people -- retired, especially, or thinking about retiring -- you have to be patient with the returns in the 1 or 2 percent rate now and then once interest rates turn up, you can lock in longer-term CDs or bonds that offer a better interest rate over five or 10 years. But as Ben Bernanke said this week, it's going to be a while before those interest rates rise anywhere near above zero.

Vigeland: All right. Marketplace's John Dimsdale joining us from our Washington bureau. Thanks so much.

Dimsdale: Thanks, Tess.

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