Monetary Policy: The Cost of QE3
Quantitative easing began and continues in front of a computer.
If you had visited the Fed when QE1 was being implemented, you would have seen several people, daily, sitting in front of a computer, selecting securities and then buying them. Keeping track of totals, when they were done, they had spent $1,249,999,999,999.39, 61 cents less than their goal. Now $85 billion a month is being spent by the Fed. Adding together QE1, QE2, and QE3, close to $4 trillion could pour into financial institutions.
The result? Historically low interest rates.
This week, when Federal Reserve Chairman Ben Bernanke said QE3 (the 3rd round of quantitative easing) would continue because the economy is still fragile, not everyone responded jubilantly.
What if you have $360,000 in savings? Retired, you depend on the return from your investment. With a 5% return, you might have gotten $18,000 annually from certificates of deposit (CDs) in addition to maybe $18,000 from social security. Each month, you would have received $3000. Now, because that CD return is close to zero, your monthly income plummets.
This takes us to the baby boomers.
Every month, for the next 16 1/2 years, 10,000 baby boomers will celebrate their 65th birthday. Pew Research says boomers feel 9 years younger than their chronological age and consider 72 the threshold of old age. I wonder though, how retired boomers are feeling about QE3, especially with food and gas prices relatively high. (Please see the ground beef graph below from the Bureau of Labor Statistics. Since January, 2008, ground beef has risen from 2.30 a pound to $3.45 during August 2013.)
So when, Chairman Bernanke says that his monetary policy goal is very low interest rates until 2016, you can see the tradeoff. Lower interest rates are supposed to target the corporate borrowing that creates more jobs, fuels expansion, elevates tax revenue and buoys stock prices. But many senior savers pay the cost.
Sources and Resources: Talking about the plight of savers, the NY Times, here and USA Today, here do a good job of conveying the cost of quantitative easing. To see how Dr. Bernanke commented, here is a WSJ blog and his ‘Conversation With the Chairman” talk. Finally, the St Louis Fed was my source for the interest rate graph and the Bureau of Labor Statistics (BLS), for ground beef prices while here is Pew Research data on baby boomers. Finally, here is an excellent marketplace “White Board” video that explains quantitative easing in 10 minutes.
Please note that several sections of this post appeared previously.