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Senator Toomey Highlights the Plight of Savers to Fed Chair Yellen

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Senator Toomey Highlights the Plight of Savers to Fed Chair Yellen

Fed Chair Janet Yellen was before the Senate Banking Committee today in her semiannual monetary policy report to Congress. Fed Chair Yellen described the general process that will lead to rate hikes. First is the change in forward guidance in which words like "patient" will be removed.Then after two additional meetings, the FOMC will be "considering an increase in the target range for the federal funds rate on a meeting-by-meeting basis." All decisions to move toward normalization will depend on economic conditions continuing to improve.

According to this Reuters article, "investors interpreted Yellen's testimony overall as likely indicating a later date for liftoff." Expectations for the first rate hike were moved from September to October of this year.

Fed Chair Yellen received mixed messages from the Senators regarding what they thought about moving toward normalization. Some Senators urged caution about raising rates. A few Senators had the opposite advice. The most vocal was Senator Pat Toomey, a Republican from Pennsylvania. He has a long history of warning about the high cost of this zero interest rate environment on savers and retirees. I first wrote about his support for savers two years ago. In today’s hearing, Senator Toomey made the strong case of why rates should be increased. Below is an excerpt of his opening remarks to Fed Chair Yellen:

Senator Pat Toomey (R-PA):

I can’t help but observe what strikes me as a very obvious paradox here, and that is the financial and economic crisis is over. It’s been over for years, at least 6 or 7 years, and yet we still maintain crisis level interest rates. We got no wave of defaults or massive bankruptcies going on. We have unemployment that has gone from 10% to sub 6%. GDP growth has been weak. I think that’s easily explained by the avalanche of new regulations, certainly not monetary policy, but it has been positive for years. Consumer sentiment is relatively high. The FOMC in January described the economic recovery as solid. Walmart, interestingly, has made an announcement that suggests we might even be approaching NAIRU.

The crisis has been over for a long time, and it’s not as though there is no price to be paid for having this unbelievably accommodative policy. Most immediately, I see the problem incurred by my constituents who may have spent a lifetime working hard, sacrificing, saving, forgoing a vacation they might have taken, forgoing a splurge here and there so they could save for their retirement and buy a CD, have some money on deposit at a bank and use that to supplement a modest pension or social security payments. Of course their reward now is that they get nothing. Zero. That’s what they earn on their savings, year after year.

Meanwhile of course we have all the risks associated with this. The risks of bubbles forming. I would argue that the fixed income markets probably are a huge bubble at the moment. We have the inhibition of price discovery in the financial sector. We facilitate excessive deficits because they look so manageable with the zero rate environment. Credit is rationed.

What are the benefits of this? The benefits, are at best, a timing shift in economic activity. At best we’re moving economic activity that would otherwise occur in the future, closer to the present. As we all know if artificially low interest rates led to strong economic growth, then everyone around the world would have zero interest rates and everything would be booming and that’s not the case. So madam chairman, I know you and I disagree on this, but, I would just suggest that the crisis is clearly long over. I think the time for normalization is well overdue. I hope we get there soon.

These remarks may not change the mind of Fed Chair Yellen, but it may help a little when the Fed starts to have serious discussions later this year about rate hikes. As Senator Toomey said, the financial and economic crisis has been over for many years, and yet we still have crisis level interest rates. That just doesn’t make sense.

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Comments
lou
lou   |     |   Comment #1
Senator Toomey for President!!!!
Anonymous
Anonymous   |     |   Comment #2
Extremely well said Senator Toomey.
Anonymous
Anonymous   |     |   Comment #3
The Fed has a disdain for Congress. The Fed Chair only appears in front of them because he/she is required to do so.
obsever
obsever (anonymous)   |     |   Comment #4
Toomey is mistaken.

Reward of saving is the availability of saved money at a later date when the saver might need it later on.

Savers generally are not market timers who try to lock in their principal at high/er interest rate when the market conditions are suitable and the banks or credit unions are offering high/er rates and neither do the savers generally stop saving and start taking those  vacations when the interest rates are low/er.  Savers keep saving no matter what the interest rates are.

BTW, I do not equate high/er interest I might get on my saved funds as reward at all. If I get high/er interest, then that's icing on the cake.  But my cake lies in the money I have accumulated as my savings. (Yes, I know that the inflation keeps eating a part of my cake.  But as a saver there is little I can do about it.)

BTW, it is not Yellen's job to look after me, or care for me as a saver.  I can do that on my own.  It's her job to ensure that me, my spouse, our children, our relatives, and our neighbors get to live in America where inflation is low and employment is high.  Which is what we have here today !!!
lou
lou   |     |   Comment #6
Did you read what Toomey said? Where did he say that it is Yellen's job to look after you or me? He made a cogent argument why higher interest rates would be good for the economy and the ever-present risk of bubbles forming in the financial markets because of artificially low interest rates. Although he didn't say it, why does it make sense to drive short-term real interest rates to negative levels.

The majority of governors on the Federal Open Market Committee are Obama appts that believe very accommodative monetary policy will magically lead to economic growth without any negative consequences. In fact, the Federal Reserve is now between a rock and a hard place because the financial markets are addicted to the lowest interest rates we have seen in a generation. They have created a situation where any attempt to normalize them will spawn the inevitable temper tantrum by "strung out" investors
observer
observer (anonymous)   |     |   Comment #9
Toomey: I see the problem incurred by my constituents who may have spent a lifetime working hard, sacrificing, saving, forgoing a vacation they might have taken, forgoing a splurge here and there so they could save for their retirement and buy a CD, have some money on deposit at a bank and use that to supplement a modest pension or social security payments. Of course their reward now is that they get nothing. Zero. That’s what they earn on their savings, year after year.

This is where Tommy has made his first mistake.  It's a mistake on his part to assert that "Reward" the savers are getting is ZERO.  Actually reward lies in the fact that the saver has access to whatever savings got accumulated over a period of time.  His mistake is his misplaced assumption that the reward is interest instead of access to the savings I accumulated over decades when I might need it later on.  Six years of low rate environment is nothing compared to 20/30/40 years of savings.  Low rate years & high rate years come & go.  The reward of savings - which is accumulated assets remain with me.


Toomy: So madam chairman, I know you and I disagree on this, but, I would just suggest that the crisis is clearly long over. I think the time for normalization is well overdue.

That suggestion is second mistake. Today we have low inflation & high employment.  As a saver that's what I hope will be "normal" for myself, my community & for all Americans.  I do not believe opposite - like high inflation & low employment needs to be the "normal".
Anonymous
Anonymous   |     |   Comment #18
High employment!!?  We only have "high employment" when you do not count as unemployed the millions upon millions of desperate Americans who have given up even trying to find a job!!  High employment indeed.  You are spouting bunkum and balderdash!!
a
a (anonymous)   |     |   Comment #19
So now you want to question BLS also?

But why did you stop at doubting the high employment?  Why not raise the doubt that do we really have low inflation?  I am sure you can find issues with the way inflation is computed also.
Anonymous
Anonymous   |     |   Comment #21
Have you lost your mind?  Question the BLS?  I'm using their numbers, you numskull!  I feel sorry for you.  If you really want to know the truth, start by reading this piece:

http://www.gallup.com/opinion/chairman/181469/big-lie-unemployment.aspx

But there are numerous other reports regarding this fraud.  How could you not already be aware of this?   I thought everyone knew by now.  This has been ongoing for a long time.

If you need more proof, read this piece the entirety of which is based on BLS numbers!!

http://www.heritage.org/research/reports/2014/09/not-looking-for-work-why-labor-force-participation-has-fallen-during-the-recovery

And stop with the false accusation I'm not using BLS numbers.  Of course I'm using their numbers!!  I do plead guilty, though, to not being overly simplistic in my analysis.
Anonymous
Anonymous   |     |   Comment #20
Oh, if only it was true.
a
a (anonymous)   |     |   Comment #13
What's your concern about who appoints governors?  My concern is what's the inflation & what's the employment?  If the inflation is low & employment is high, then the thing is not broke, so don't fix it.

Since the inception of federal reserve there are republican admins & democratic admins, so over last few decades there are some appointed by republicans some by democrats. I would not worry about it because the various administrations in turn are elected by us.  I would worry about how much I am saving & how much I am spending.

Although he didn't say it, why does it make sense to drive short-term real interest rates to negative levels.

Are you trying to put words into his mouth? Or are you making some of your own point hiding behind him?  If you have something to say why don't you come out & say it? Why do you need coattails of a politician?
a
a (anonymous)   |     |   Comment #14
Yes. Toomey is wrong.

For most middle or low income working Americans two or three paychecks will easily exceed the net figure on 1099-INT.  This would have been true for most retirees during their working years.  It is obvious to most savers that "reward" for us is easy access to the "principal" we've saved when we want it.  The amount on 1099-INT is the bonus. We will get it during periods of high interest.  We won't get it during periods of low interest.
Anonymous
Anonymous   |     |   Comment #29
that's utter nonsense.  Banks don't excuse borrowers from paying interest.  Why should savers accept nothing.  Why don't we just each get  big fireproof safe and keep all of our money in it and then the country go to hell because nobody with enough money to buy congress is willing to pay for anything.  The money we saved will NOT be available to us because of inflation.  Even if we spent nothing of our savings during the 8 years they interest has been confiscated (and, don't forget, it was not taken because of "the invisible hand of the free market" but because bankers can afford to buy congress and bankers wanted money to make up for what bankers lost with their greed and poor judgment.  Why shouldn't people pay for borrowing money from other people?  Again, a large portion of the American public is fine with bankers cutting interest on borrowed money in half, but taking all away all of the interest that they used to have to pay to savers.  YOU CAN DO SOMETHING about inflation and that is to demand interest that is at least higher than that.Do you seriously think that the money stolen from savers isn't going somewhere up the income ladder?  The banks don't even have to lend it anymore…they get 2% for just keeping it "on reserve" and the Fed pays the by taking money from other people.  Banks pay 1/12 of 1% to savers and get back 1 and 1/12 of a percent for doing nothing.  They get to keep 23/24ths of the rewards of frugality.  And your employment argument is just plain stupid.  if savers were still getting interest, they would be spending it on things like home maintenance  and dental care and hair dressers and green vegetables and a lot of stuff we can't afford IF we want to leave a pittance to our own kids.  Why should the rich be the only ones who can leave something to their kids?  Bankers who are being rewarded for raping the world economy….they are taking why they steal from savers and putting it in Swiss banks.  You might enjoy the slightly lower interest rates, but your kids won't be thrilled when they see that if here is a home to be left to them, it won't have been maintained to any standard.  Another reason for the zero rate for savers is that the government doesn't want to have to pay savers for using their money either.  We can't get the rich to pay their fair shares, so all we can do is steal from the savers.  i'm glad that somebody thinks that this theft is a good thing that says good things about a good country.  But if you really think that, you haven't been paying attention 
Mary Jean Mayer Golden
Mary Jean Mayer Golden   |     |   Comment #30
That’s crap…..the money is not available very much later…it gets eaten up by inflation, and when the interest rate is way below inflation, it’s a massive transfer from savers to debtors, and the biggest debtor of all is the federal government, who no longer has to pay interest to  buyers of government bonds.  Of course, money is changing hands…..the interest we used to get from bankers stays in bankers’ pockets and we savers will be unlikely to be able to leave even a pittance TO OUR OWN KIDS.  The Fed and its lackeys in the government didn’t have to take all interest…they could have left something for dental care and home maintenance and a bit in case we are unlucky enough to need nursing home care, but they didn’t  They took all but an tiny eyespeck that keeps us from saying truthful, “Now the ****s have taken it all.”  It’s a shameless grab from people who couldn’t buy favor with the government,and, of course, the government can’t tax the rich or the corporations.  If’s exactly like the Mafia protection racket.  If you can’t afford to buy their favor, they will burn down your house (or else take away what you saved so you could maintain it).
Anonymous
Anonymous   |     |   Comment #5
Rates aren't going up meaningfully for years, the fed is not going to risk all they have put into this just to make it possible for people to get a 5% cd rate. I invest in CDs also but it is what it is, unfortunately savers just aren't that big of a chunk of the population so think 2018 that is when I believe rates will move up....if we're lucky. What if the fed did raise the fed funds rate  1/4 of a percent.... whoopee. 
Anonymous
Anonymous   |     |   Comment #7
No serious rate hikes until absolutely necessary. Why? One word. Derivatives.
oabobmck
oabobmck (anonymous)   |     |   Comment #8
Toomey was great.  Yellen remains unphased.  She won't admit that the Fed Policy has cost investors in CDs at least 2.5% every year for the past several years.  She thinks all CD investors have stocks and other investments that are benefitting from this environment.

So much for my strategy of investing in only guaranteed vehicles such as CDs and  treasuries held to maturity.

We need leadership like Volcker gave the Fed decades ago, but the Fed has taken on the mission of protecting the markets from reflecting poorly on the economy. 
Anonymous
Anonymous   |     |   Comment #11
1st- Savers in CDs are a small % of the population.
2nd- Do you really think if the economy was in the dumps that rates would be high, fed or not?
3rd- Did you ever hear of diversification? All your money in one sector is dangerous.
4th- Volcker raised rates to break inflation, how much inflation would you be happy with?
5th- When the economy dumps and you know the fed is going to step in where is the logical place to have some money?
6th- When the fed stopped buying bonds rates dropped even lower so it looks to me like QE was lifting yields.
Anonymous
Anonymous   |     |   Comment #10
The end result from the market`s point of view was to borrow even more money, and buy risk assets in the form of bonds and stocks.
http://www.zerohedge.com/news/2015-02-24/janet-yellen-encourages-more-levered-risk-taking-markets-tu...
buckeye61
buckeye61   |     |   Comment #12
I think the main point is the economy no longer needs "Emergency"level low rates. We may be many years from needed high interest rates to cool the economy or battle high inflation, but there is no good reason for rates to remain at zero. The FED should raise the overnight rate to 2% then pause as long as necessary, but be ready move rates even higher if needed.
Anonymous
Anonymous   |     |   Comment #15
Congress gives the Fed their mandate( Low inflation and high employment). They then rant during the congressional hearings because we do have low inflation and high employment. Who is being duped here? It is all a show when will the people wake up. She is doing just what she was mandated to do. 
q
q (anonymous)   |     |   Comment #17
Correct.  Her mandate is clear & she is doing her job well.  Low inflation & high employment is what's good for America.

Politician Toomey is using his seat on banking committee as bully pulpit to rant about something irrelevant.  Too bad that the structure allows politician free hand to rant.
Anonymous
Anonymous   |     |   Comment #23
This is the moment when small-time investors surrender their long-simmering fear, get their cash out and head into the market. Many will foolishly extend themselves on margin. It happens every time a bull market persists beyond reason. "I missed those gains and I'm not going to miss any more", is the thought of the day. The only problem is bull markets end and this group of investors is hurt badly. Yellen is supporting the banks because it was a lot worse than most people realize and she knows the next crisis may be far worse and much longer lasting.
Anonymous
Anonymous   |     |   Comment #16
Interest rates will turn higher to break the rise of inflation. 
Anonymous
Anonymous   |     |   Comment #24
Glad someone sees the falacy in this.  The Federal Reserve's primary accomplishment has been the meteoric and artificial rise in stock prices.  They will wait until the Dow reaches close to 20,000 to increase interest rates.  That way even if the stock market falls, it will fall to about 17,000 and they can have their cake and eat it too.  This has been the most blatant manipulation of the stock and bond market I have seen in all the years of my life.  My hope is someone will hold these individuals responsible.
Anonymous
Anonymous   |     |   Comment #25
More likely a fall back to 16,000 (or lower) which is 14% above the 2007 high of 14,000. Let's see, 14% divided by 8 years is 14/8 = 1.75% per year. Yep, that's what happens to a lot of hapless investors, especially those that "stay the course". That advice (stay the course) will, of course, cost you a 1% annual fee.
GhostHost
GhostHost (anonymous)   |     |   Comment #26
Janet Yellen, and the Obama appointees, are holding rates low to maximize near term economic growth.  It's that simple. Who benefits?  Obama, who gets to claim that the Democratic way works, that you can have tax increases and regulation, and still generate economic growth.  Of course you have to ignore the Stimulus program, zero rates, and 500B+ deficits.  Not too hard for most voters.  And this might also help elect another Democrat.
CuriousDave
CuriousDave (anonymous)   |     |   Comment #28
Sen. Toomey may mean well, but he still fails to grasp why rates remain so low. The banks remain on thin ice. They are still heavily infected with counterparty risk, especially risk associated with very high exposure on interest rate swaps. The forced and sustained reduction of interest rates to their historically low levels were intended to provide relief and breathing space to allow the banks time to build up their reserves with wider rate spreads and to improve their shaky balance sheets. They are still shaky, so chances are the Fed will continue to keep rates low for an extended period. Even if rates are raised, it will happen very slowly over a very long period. Meantime, savers have, in effect, been subsidizing the banking industry.
Concerned Saver & Retiree
Concerned Saver & Retiree (anonymous)   |     |   Comment #31
Janet Yellen should be removed as Chair of the FRB...She has caused Savers, Retirees, and Pension Funds great losses over the past 8 or 9 years...Remove Yellen as soon as possible...
Anonymous
Anonymous   |     |   Comment #32
To me interest rates have always reflected the price of money.  When there is high demand for limited available funds, interest rates increase.  When there is slack demand for large available reservoirs of funds, interest rates decrease.

The low interest rate, relatively low inflation, Obama years have worked out quite well for me personally.  I think, if Mrs. Clinton wins a month from now, the Obama pattern will tend to continue.  Should Trump win, OTOH, I think business activity will pick up markedly, increasing the demand for money and causing interest rates, and inflation, to move higher.  At the same time, though secondarily, I think a Trump victory will bring higher interest rates because in 2018 he will replace Janet Yellen at the Fed.

Those wishing for higher interest rates need to be careful what you wish for;  you just might get it.  I would be more critical of the Obama years if he had given us stagflation.  He did not!  At the bottom line, looking back, we could be in much worse shape than we are in.  I'm no shill for Obama, far from it.  I do not support him.  But just being honest, from where I sit Obamanomics could have been a LOT worse.