Many economic policies of the federal government have a fairly obvious effect on the financial well-being of the citizens. Tax rates, commercial regulations and trade policies are fairly transparent, albeit sometimes very complex. The Federal Reserve’s monetary policy, however, can at times have a self-serving purpose that runs counter to the interests of many individual investors and savers. In the early 1970s two Stanford economists referred to this type of monetary policy as “financial repression.”
In a recent white paper, Eaton Vance Investment Managers defined financial repression as the intervention of government in “capital markets in an attempt to improve their own financial position… at the expense of savers’ financial positions.”
Currently, the Fed is keeping short-term interest rates very low, many argue artificially low. The federal funds rate has been in the range of 0.00% to 0.25% (before inflation) for the last three years. Given the increasingly heavy debt burden that the federal government is operating under, it is in the government’s interest to refinance debt, when it matures, at a low interest rate.
The problem for individual investors and savers is that market interest rates tend to be tied, at least somewhat, to the monetary policy of the Fed. Therefore the rates of return on short-term, relatively low risk investments (T-bills, CDs, and low-duration fixed-income funds) are excruciatingly low. In fact, when inflation is factored in, the returns on these investments have tended to be negative over the last few years. For those who are living off of a fixed income, especially, this has been a problem.
One alternative to accepting negative real returns is to invest short-term assets in riskier investments such as stocks and longer-duration bonds. With the elevated volatility of the stock market and the tenuous nature of the market interest rate environment, these options could create irreversible financial damage for those who can least afford it. Such is the predicament that the policy-makers have gotten themselves, and many innocent bystanders, into.
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