U.S. Investors See Trade-Offs With Low Interest Rates

PRINCETON, NJ -- When asked to assess the economic trade-offs associated with low interest rates, two in three U.S. investors say the benefits of low rates outweigh the costs. However, retirees and nonretirees differ significantly about this. Seventy-three percent of nonretirees say the benefits outweigh the costs, while 22% hold the opposite position. Retirees are more evenly divided, with 47% saying low rates provide a net benefit, while 43% say the costs outweigh the benefits.

The Wells Fargo/Gallup Investor and Retirement Optimism Index survey, conducted quarterly, defines investors as those having at least $10,000 of investable assets.

Policymakers Should Consider the Harm Lower Rates Do to Older Americans

Nearly two in three investors (63%) say they think policymakers should take into account the harm low interest rates do to older Americans when they seek to keep interest rates low for an extended period of time. This includes 61% of nonretirees and 68% of retirees. Low rates tend to be more of an issue for retirees, given their greater dependence on low-risk investments for their retirement income.

Many Investors Say Low Interest Rates Have Negatively Affected Them

As noted earlier, most investors feel lower rates are good for the economy. Given the obvious benefits of low rates, the May 4-12 Wells Fargo/Gallup poll sought to assess the potentially negative impact of extended low interest rates on U.S. investors.

Retirement-related consequences rise to the top of a list of potentially negative effects of low interest rates, according to the poll. More than three in 10 investors say they fear outliving their retirement savings (42%), that they expect to live or are living less comfortably in retirement (38%), that they are forced to delay their retirement (33%), or are saving less for retirement (31%). The only nonretirement concern above the 30% level is giving less money to charity (35%).

One in four investors say low rates have forced them to take more overall portfolio risk than they might otherwise, and similar percentages say they have put money into investments they might otherwise avoid or, for retirees, that they had to take a distribution from their portfolio. More than one in four investors also say they are being forced to provide less financial help to their children and/or parents.

Another possible downside to today's low interest rates is their potential to create future inflation, particularly as they affect commodity prices, including food and energy. When asked about this possibility, most investors think it is at least somewhat likely that today's low rates will lead to a sharp increase in inflation in the years ahead. Thirty-two percent say increased inflation is extremely or very likely and another 50% say it is somewhat likely, while 14% say it is not at all likely.

Implications

Over the past four years, Federal Reserve Board Chairman Ben Bernanke and the Federal Open Market Committee have taken extraordinary steps to keep interest rates low. The goal seems to be to stimulate economic activity by making it easier for consumers and businesses to purchase durable goods. But this has pushed investors into riskier assets by depriving them of the low-risk, higher-rate options that retirees most often desire.

Wall Street has benefited as today's low interest-rate policies have supported equity prices. Homeowners have been able to refinance, new home buyers to qualify for a new mortgage, and car buyers have also benefited. Businesses have been able to finance their debt at lower costs and the federal government has paid less to borrow the funds needed to finance the federal debt.

However, these economic benefits have not come without a cost. Many investors say they have been forced to delay their retirement. Many nonretirees are having trouble building their investment portfolios for retirement, given the low rates of return available in today's markets. Some investors have had to take more risk than they normally would -- given their stage of life -- just to maintain their standard of living in retirement. Many investors expect to live or are currently living less comfortably in retirement.

As signs increase that the U.S. economy is slowing down, Wall Street is talking about the possibility of additional quantitative easing by the Fed -- flooding the economy with more money and driving rates even lower. At the same time, interest rates are falling to new lows as fears of a global financial crisis and recession have created a flight to quality -- and many global investors looking for a safe place to keep their money are turning to U.S. treasuries as their safe haven of choice.

As policymakers consider the net economic benefit of additional efforts to ease monetary policy, they might want to consider the request of two in three investors that they also take into account the harm low rates are doing to older Americans. While it is not clear that more quantitative easing will be of significant benefit to the economy, it seems likely that the more heroic monetary policy efforts become, the more difficult they are going to be to undo, and the longer investors will have to endure the consequences of today's artificially low interest rates.