By Steven K. Beckner

(MNI) – Federal Reserve Governor Sarah Bloom Raskin said Thursday
that the very low level at which the Fed is keeping interest rates is
minimizing the returns Americans can get on their savings, but she said
the adverse impact on savers is outweighed by the potential benefits to
the economy.

Although they can earn little on their savings with a near zero
federal funds rate holding down other interest rates, Raskin said
Americans are benefitting from the very low rates as borrowers. And she
said low rates also are designed to incentivize business borrowing and
investment.

Besides, most Americans don’t leave their money in low-earning
savings vehicles, she said in remarks prepared for delivery to the Y’s
Men of Westport, Connecticut.

Given continued “headwinds” to economic growth and job creation,
she suggested, this is not the time to talk about raising rates.

Referring to the Federal Open Market Committee’s expectation that
the funds rate will stay near zero “through at least late 2014,” Raskin
said the earliest that the Fed might sell some of the assets it has
bought to suppress long-term rates would be 2015.

Echoing what Fed Chairman Ben Bernanke said in Congressional
testimony over the past two days, Raskin said the upsurge in gasoline
prices will increase inflation while also dampening consumer purchasing
power. But she doubted higher inflation will persist so long as
inflation expectations remain modest.

“This extended period of depressed levels of economic activity and
low interest rates will continue to have important implications for
household income flows,” Raskin said, adding that “critics of the
Federal Reserve’s accommodative monetary policy are correct that the low
level of interest rates represents a strain on households who rely on
income from interest-bearing assets.”

She noted that “the flow of interest income that households earn on
their savings has declined about one-fourth since the recession began.”

However, Raskin emphasized that “many households are benefiting
from the low level of interest rates, and some critics of the Federal
Reserve’s accommodative monetary policy seem to minimize this point.
Purchases of motor vehicles and other household durables can be financed
more cheaply, and in many cases, households have been able to refinance
their mortgages into lower-rate loans, freeing up income for other
uses.”

“In addition, interest-bearing assets represent only a modest
portion of overall household assets,” she continued, citing Fed data
showing that less than 7% of total household assets are directly held in
transaction accounts, certificates of deposit, savings bonds, and bonds.

“Instead, the bulk of household wealth is held in stocks,
retirement accounts, business equity, and real estate,” she said. “For
these other types of assets, rates of return depend primarily on the
strength of the economy and how fast the economy is growing.”

“Thus, these returns should be supported, over time, by the
accommodative monetary policy that we have in place,” Raskin said.
“Moreover, the Federal Reserve aims to keep inflation low and stable
over time, which limits the risk to investors that high inflation will
undermine the value of their savings.”

Raskin also disputed critics’ contention that “an extended period
of low interest rates will discourage households from saving and, as a
result, diminish the longer-run economic growth prospects of the U.S.
economy.”

She said that “currently, households have a number of reasons to
save in addition to their desire to earn interest.”

“For instance, they need to be prepared for unexpected expenses and
to rebuild the retirement nest eggs that were depleted by losses in
equity and housing wealth during the recession. In fact, the portion of
disposable income that households are saving has risen considerably
since the recession began,” she explained.

What’s more, Raskin said “it is important to remember that the way
that households’ savings get channeled into productive capacity is that
businesses have to be willing to use those funds to invest in expanding
their plants and starting new businesses.”

Although the FOMC consensus is for no rate hikes until late 2014 at
the earliest, three Fed officials forecast rate hikes as early as this
year in January.

But Raskin said “raising interest rates now would dampen those
incentives” to borrow and invest. “Thus, at the moment, channeling
households’ savings into the productive resources that will support our
longer-term economic growth prospects requires low interest rates, not
higher ones.”

Raskin said “the length of time required for the economy to fully
recover given the extraordinary strains of the past few years is
difficult to predict.” And so she said “the highly accommodative
monetary policy now in place is intended to provide the support needed
to strengthen the economic expansion and, over time, return the economy
to sustainable rates of output growth, unemployment, and inflation.”

“While the Federal Reserve recognizes that the accommodative policy
we have put in place to support the economic recovery may limit the
financial returns to saving for a time, ultimately our goal is an
economy that is operating close to its potential and is producing jobs,
income, and opportunities for investment that will lead to higher
returns across a range of assets for savers and investors,” she said.

Raskin prefaced those comments with a very cautious assessment of
economic conditions and prospects.

Although the recovery is about 2-1/2 years old, she observed that
“only in mid-2011 did the level of real GDP return to its level just
prior to the recession.”

“Perhaps more troubling is that real disposable personal income at
the end of 2011 was still estimated to be lower than its pre-recession
level,” she said. “As of January of this year, we had recovered just
over one-third of the payroll jobs we lost, and the unemployment rate
was still elevated at 8.3%.”

Raskin said “the slow recovery in the labor market has been
mirrored in only a modest recovery in households’ wage and salary
income. Moreover, the gradual recovery in business activity has
depressed households’ returns on their financial assets, and the value
of many homes is still depressed.”

She said “this unusual weakness in household income and wealth,
coupled with impaired access to credit, has attenuated the normal
recovery in consumer demand that typically occurs during an economic
upturn.”

Raskin said the run-up in gasoline prices “will likely push up
overall inflation in coming months,” but she added, “If, as I expect,
inflation expectations remain stable in response to the recent run-up in
gasoline prices, their influence on overall inflation should be limited
as well.”

She cited “some relatively encouraging economic news,” but said “at
the same time, the headwinds that have been restraining the expansion
for some time have been easing, at best, only gradually.”

“The housing market is still very depressed…,” she noted, and
“despite some improvement, credit conditions for many consumers and for
smaller businesses remain tight.”

And “although households appeared to become a bit more optimistic
about the outlook around the turn of the year, they were still extremely
pessimistic about their income prospects….,” she said.

Raskin added that “the run-up in gasoline prices we are currently
experiencing will presumably reduce household purchasing power in coming
months.”

Echoing what Bernanke said in his Jan. 25 post-FOMC press
conference, Raskin said, “assuming that the FOMC follows the plans that
we outlined in June 2011 for winding down the Federal Reserve’s balance
sheet, any initial sales of our securities holdings presumably would not
begin until 2015, sometime after the first increase in the target
federal funds rate.”

** Market News International **

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