Decline in Interest Rates Could Backfire on Bush : Many people would not benefit from more easing, since returns on CDs, savings accounts and Treasury bills are already low.
President Bush may be pressuring the Federal Reserve Board to cut interest rates further, but--surprising as it may seem--not everyone agrees that lowering rates is a good thing.
Take Americans who are looking for a place to deposit their savings, for example.
As anyone who has tried to open a savings account can attest, banks are not paying nearly what they used to pay on deposits--even as late as a year ago.
The current interest rate on certificates of deposit is 5.25%, down from 8.5% in 1990. And in New York, Citicorp has announced that it is cutting the interest it pays on interest-bearing checking accounts to only 2%, the lowest rate in recent memory.
Some pundits warn that the reductions could backfire politically on the Administration. GOP analyst Kevin Philips contends that opinion polls reflect increasing voter annoyance with Bush over plummeting interest rates on savings accounts and money market accounts.
If the issue does not fade, he argues, “it’s possible to see the outline--especially if the economy remains soft--of how interest rates . . . could become a significant 1992 issue. Populist politicians, in particular, could be tempted.”
Both Republican and Democratic analysts say that the anger is particularly acute among older, more affluent Americans who are finding that they cannot “roll over” their certificates of deposit at the same interest rates they enjoyed last time around.
But David Wyss, an economist for DRI/McGraw Hill Inc., a Lexington, Mass., economic analysis service, contends that the economics of the interest-rate decline suggest that the falloff is not likely to become a populist phenomenon.
“My father-in-law is up in arms,” Wyss concedes sheepishly, but “this won’t hurt the middle class--unless you define middle class as people with a $200,000 income. This is an issue for retirees with assets,” Wyss contends, “and for the rich.”
The economic impact is easy to see. Affluent retirees generally are creditors, not debtors. Many already have paid off their mortgages. Their credit-card debt is minimal. And they have little need for loans.
Traditionally, they have put their money into relatively safe investments, such as CDs or Treasury bills, which used to reap a good return. With interest rates on those kinds of investments now sharply lower, this group feels hurt.
By contrast, Americans in the baby-boom generation are probably winners in the interest-rate decline. They emerged from the 1980s with children, a house and a large amount of debt--and interest charges on all such loans have come down substantially.
“The baby-boomers should be benefiting, because they can borrow at lower rates,” says Cynthia A. Glassman, an economist and banking analyst at Furash & Co., a Washington financial consulting firm. About 75% of household debt typically is mortgage debt.
Jerry Jordan, chief economist at First Interstate Bancorp in Los Angeles, points out that such ups and downs run in cycles and are not necessarily election-busters. In the late 1970s, for example, high inflation--and interest rates--benefited debtors and hurt older Americans.
The high interest rates of the 1980s sent borrowing costs soaring and spurred the return on investments to unprecedented levels, easing the pain for retirees while hurting younger families that were just setting up households.
“Now, in the ‘90s, we are in a process of adjustment” again, Jordan says. Interest rates are coming down, the cost to borrowers is declining and the return to lenders is falling. “So the intergenerational transfer is now going the other way.”
Analysts say that while some depositors may feel cheated by the decline in interest rates paid on their savings, it is not clear yet that the disappointment has reached a level that will translate into trouble for Bush at the polls.
With inflation also running fairly low, the so-called “real” interest return--that is, the interest that depositors receive, adjusted for inflation--on such key investments as three-month Treasury bills is still near historic highs.
But Furash & Co.’s Glassman warns that the phenomenon could intensify if it continues.
“People’s memories are short,” she says, “and for people on fixed incomes, this could be a significant reduction in cash flow, if they don’t find another form of investment.”
Interest Income Over the Years
Total Percent The in of overall Prime Year billions Income Rate 1960 $24.9 6.1 4.8 ’61 26.3 6.2 4.5 ’62 28.9 6.4 4.5 ’63 32.2 6.8 4.5 ’64 35.5 7.0 4.5 1965 39.6 7.2 4.5 ’66 44.2 7.4 5.6 ’67 48.2 7.5 5.6 ’68 53.2 7.5 6.3 ’69 60.9 7.9 8.0 1970 69.3 8.3 7.9 ’71 74.7 8.4 5.7 ’72 80.8 8.2 5.3 ’73 93.3 8.5 8.0 ’74 111.9 9.3 10.8 1975 122.5 9.3 7.9 ’76 134.1 9.2 6.8 ’77 155.4 9.7 6.8 ’78 182.5 10.1 9.1 ’79 221.5 10.9 12.7 1980 271.9 12.0 15.3 ’81 335.4 13.3 20.5 ’82 369.7 13.8 14.9 ’83 393.1 13.8 10.8 ’84 444.7 14.3 12.0 1985 478.0 14.4 9.9 ’86 493.2 14.0 8.3 ’87 523.2 13.9 8.2 ’88 571.1 14.1 9.3 ’89 643.2 14.7 10.9 1990 680.4 14.6 10.0 Aug. 1991 $670.2 13.9 8.0
