The Federal Reserve fired its last bullet today by formally cutting interest rates to zero percent.  A Fed statement noted that  “The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability”.   In addition, the Fed will keep rates at this exceptionally low level for an extended period of time.

To date, the Federal Reserve has spent trillions and driven down rates on short term treasury paper to zero.  None the less, rates on loans for most individuals and corporations are much higher than when the credit crisis began.   One area that that has seen rates decline to all time lows is home mortgages, although it is debatable how many borrowers qualify for the best advertised rates.   Those most in need of funding are most often turned down at any rate due to issues with credit, income or collateral.

I have yet to hear of anyone who feels that the Fed really made a difference and saved them from financial ruin by cutting rates.  Whatever savings might have been accrued by the average consumer have been more than  outweighed by the losses suffered in their retirement portfolios and home equity declines.  The banking system was saved, the average worker was not.

One group that has and will continue to suffer great stress due to diminished income is the never mentioned saver.  The saver group by definition spent less than they made due to thrift and hard work and put their savings in their local bank so that they money could be lent out to borrowers who bought homes and such, frequently at 100% financing.  Now that the borrowers are in trouble, the Fed needs to cut rates to help them.  Helping those in trouble is fine, but the consequences of the Fed’s rate cutting campaign is impoverishing those very same people who provided savings capital to lend in the first place.

Let’s take the case of a Walmart clerk who retires after 30 years of service and is awarded a pension of $25,000 per year.  The Walmart clerk’s retired neighbor lives off a $2,000,000 trust fund established by her father who directed that the monies be conservatively invested only in government debt securities.  The trust fund provides a life interest of income only to the beneficiary.   The original $2,000,000 principal goes to charity after the beneficiary’s death.

This $2,000,000 trust fund, laddered in 6 month and 2, 5 and 10 year government paper yields a total of $22,100 at today’s interest rates.   Should the Fed succeed in driving long term rates to the sub 1% level that we see in Japan today, the trust fund baby would be lucky to receive $10,000 per year.

Result of ultra low interest rates?

Walmart worker stays retired and lives poorly.  Trust fund baby lives poorly and goes back to work at Walmarts.