Consumer advocate had criticized Fed policy, saying it hurts savers
By DAVID HARRISON Updated Nov. 23, 2015 5:25 p.m. ET
Federal Reserve Chairwoman Janet Yellen wrote to consumer advocate Ralph Nader on Monday that low returns on savings are “fundamentally” caused by “the continuing aftermath of the financial crisis and the severe recession that followed it” rather than Fed monetary policy.
In response to a letter from Mr. Nader, Ms. Yellen defended the Fed’s policy of holding rates at near-zero levels since 2008, saying that helped spur the economy. In particular, she wrote, lower rates propped up house and stock prices and prompted consumers and businesses to invest and create jobs.
Higher rates, she wrote, would have had dire consequences.
“Unemployment would have risen to even higher levels, home prices would have collapsed further, even more businesses and individuals would have faced bankruptcy and foreclosure, and the stock market would not have recovered,” she wrote. “True, savers could have seen higher returns on their federally-insured deposits, but these returns would hardly have offset more dramatic declines they would have experienced in the value of their homes and retirement accounts.”
Higher rates could even have cost these savers their jobs and pension plans or forced them to support unemployed children and grandchildren, she added.
Ms. Yellen said she and her colleagues expect more improvement in the labor market and for inflation to move toward the Fed’s 2% goal.
“If that is the case, my colleagues and I have indicated it will be appropriate to begin to normalize interest rates,” she wrote. “Most of us expect the pace of that normalization to be gradual.”
Raising rates too rapidly could hurt the expansion and force the Fed to backtrack and lower rates once more, she said. “Other countries have paid a heavy price for being forced to reverse course,” she wrote. “Japan, where interest rates have remained near zero for most of the past 25 years, serves as a cautionary tale.”
Fed officials have indicated they could begin the process of raising interest rates at their next meeting in December.
Mr. Nader wrote to Ms. Yellen in October on behalf of a group called “Savers of America,” calling the Fed chief to task for holding rates low and hurting savers.
“We want to know why the Federal Reserve, funded and heavily run by the banks, is keeping interest rates so low that we receive virtually no income for our hard-earned savings while the Fed lets the big banks borrow money for virtually no interest,” he wrote.
The letter was criticized by Fed observers and on social media for Mr. Nader’s plea that Ms. Yellen, a widely respected labor economist, turn to her husband for advice.
“I think you should sit down with your Nobel Prize-winning husband, economist George Akerlof, who is known to be consumer-sensitive,” he wrote.
Ms. Yellen’s response mentioned neither Mr. Akerlof nor Mr. Nader’s suggestion.
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