• November 28, 2022

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Applaud the Federal Reserve and Wall Street. Their new actions are restoring a forgotten powerhouse of capitalism: Savers.

The Federal Reserve is raising short-term interest rates, thereby supporting thrift and resurrecting long-lost interest income for savers. At the same time, Wall Street is driving up longer-term interest rates, restoring proper return vs risk levels for investors. The result will be a rebalancing of consumer, business and investment relationships and strengths.

This rebalancing will also help correct some of the “inequitable” issues linked to the Fed’s near-0% interest rate policy (i.e., big returns for investors versus minuscule interest income for savers). The Wall Street Journal provided proof of the shifting already at work in today’s (May 10) Heard on the Street article, “Fed Move Sets Off Deposit Rate Spree.”

“Fed’s quickening pace of tightening raises prospect that consumers and businesses may aggressively look to earn more on their cash.”

They report the results of the Morgan Stanley survey that links inflation outlook to consumer-saver thoughts and actions (underlining is mine):

“A recent survey of about 2,000 U.S. consumers, published by Morgan Stanley analysts on Monday, found that concern about inflation was the highest ever in their survey history. Over 40% of respondents said they would consider opening a new savings account for a rate of 1%, and over 60% would consider it for 2%.”

Think about that. With inflation running far above 2%, people are ready to act on behalf of their non-earning cash deposits. Moreover, they are willing to do so for a rate of only 1% or 2%. After more than a decade of 0.0-something% rates, anything with whole percentage numbers (1% and higher) looks desirable. Savers aren’t yet at the point of wanting a “real” (inflation-adjusted) interest rate – but they will get there. When they do, they will help promote the return of capital markets’ multiple participants (capital providers and capital users) determining interest rates.

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So, how can savers drive the capital markets?

Savers have been a neglected force because the Federal Reserve kept capital overly cheap and plentiful. In past times, savers provided important cash balances and flows to banks for the making of personal and commercial loans that, in turn, promoted economic activity. However, for the past many years, those assets have exceeded banks’ needs. With the Fed now winding down its policies, the importance of savers is winding up.

In addition, savers have community clout. They have similar desires and needs, and their combined assets are multiple $trillions. And now they have awakened to their shrinking purchasing power as inflation becomes an issue.

While savers may be satisfied by the higher savings account interest rates coming, banks will later entice them with higher-earning time deposits, like CDs. Then come the investment firms, encouraging the use of money market funds and other income products.

The bottom line: As savers gain respect – and income – everyone wins

Savers lost respect and access to a “fair” income over twelve years ago. Barron’s October 19, 2009 cover page carried this large font title: “C’mon Ben! Give Them a Break.” (Ben was Fed Chair Ben Bernanke, and “them” was savers.)

“It’s time for the Federal Reserve to stop talking about an ‘exit strategy’ and to start implementing one. There’s no need for short-term rates to remain near zero now that the economy is recovering.”

This article was spot on and in line with Wall Street’s views. However, Ben wouldn’t budge. Instead, he began his multi-year mantra of, “Yes, things are better. However, they are still not good enough.”

From that point forward, the trillions in savings (and CDs, money market funds, and short-term bond funds) not only earned next to nothing, they suffered the inflation “tax” that steadily reduced purchasing power by well over 20%.

Now, finally, that lost respect is returning, and savers with their growing interest income will once again enliven the U.S. economy and financial system.

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