R.T. Young, Ph.D. Business Economics
The Federal Reserve (the “Fed”) is rife with criticism of its policy missteps. From the “inflation fighter” Paul Volker in the late 70s and early 80s to the “kept interest rates too low for too long” Alan Greenspan, many Fed observers see the mistakes of the U.S. central bank as an indication that the Fed is too limited in foresight to provide reliable policy guidance.
Presuming Fed managers actually do lack much foresight, as the argument goes, then why allow the Fed’s “money bureaucrats” to manipulate financial asset prices?
Among the effects of manipulated financial prices, observers of the Fed point to the distributional effects of the institution’s policies.
What’s implied by distributional effects?
In a nutshell, Fed policy hurts some in order to benefit others.
Of the many distributional effects, one of the most commonly mentioned is the benefits to owners of stocks versus the reduced income to holders of bonds and other interest-bearing securities.
This article looks at what interest income has done by state since the Fed began lowering interest rates in August 2007.
As some background, Fed policy is often referred to as being either “loose” or “tight.”
A loose Fed is a Fed that has lowered interest rates to abnormally low levels out of stated concern for employment growth (presuming the Fed actually can manipulate employment growth).
A tight Fed is a Fed that has increased interest rates out of concern for inflation.
The following two figures provide a recent history of Fed loosening and tightening cycles.
The first is the tightening cycles.
Since 1970, there have been nine tightening cycles. Interestingly, the tightening cycle that began in May of 2004 was the longest on record, lasting almost 1,200 days, or about 3 ¼ years. Also, interestingly, the most recent tightening cycle was the weakest on record, with the effective federal funds target rate (the interest rate the Fed directly influences) rising only about 4 percent, from about 1 percent to about 5.25 percent.
As another observation, the tightening cycles have generally gotten weaker, with the 2000s cycle about a percent less than the 90s tightening.
(A note of the graph: each colored line represents a tightening cycle. The label for each line is the year and month in which the Fed began the tightening cycle. The vertical axis is the interest rate, or the effective federal funds rate. The horizontal axis is the number of days since the beginning of the tightening cycle).
On loosening cycles, the Fed has engaged in ten loosening cycles, the longest of which by far is the recent loosening cycle, soon to be at 2,500 days (almost seven years). Prior to the unprecedented recent loosening, the longest loosening cycle started in April 1989 and lasted about 1,720 days (about four and three-quarters years).
(A note about the graph: each colored line represents a loosening cycle. The label for each line is the year and month in which the Fed began the loosening cycle. The vertical axis is the interest rate (or the effective federal funds rate). The horizontal axis is the number of days since the beginning of the loosening cycle).
So, how has the Fed’s unprecedentedly low interest rate policy affected interest income?
Here’s a look nationwide.
Unsurprisingly, the amount of interest income gained by individuals dropped like a rock after the third quarter of 2007, from a high of $1.38 trillion to a low of $1.18 trillion, a decline of about $200 billion. Moreover, if one included the trend in interest income, the amount of interest income missing from the economy is about $250 billion.
The missing $250 billion has various disproportionate effects. For instance, older Americans generally hold assets with interest income attached. Because of this, older Americans are most harmed by the Fed’s low interest rate policy. In addition to demographic effects, the Fed’s loose monetary policy includes a geographic component.
Here’s an animated GIF showing how interest income as a percentage of total income has changed by Metropolitan Statistical Area (MSA) over the last 40 years.
(As a note, the animated GIF is colored according to a rank of interest income by MSA. MSAs with a high interest income importance to the total income as more orange/red, while MSAs with less importance placed on interest income are highlighted bluer.)
Surprisingly, when looking at the MSA ranking across time there’s not much of shifting, with the exception of some MSAs in California, Florida, and the Rust Belt.
So, which MSAs are the big losers from the Fed’s loose interest rate policy?
In looking at the geographic rankings, individuals in Florida and along the West Coast lost the most. The financial centers, including Washington, D.C., Long Island and similar East Coast areas also lost quite a bit.
Instead of trying to guess, here’s a list of the 25 biggest losers, as measured by the change in interest income from 2007 to the end of 2013.
On top of the list is the New York-New Jersey-Long Island, NY-NJ-PA MSA, down about $10.8 billion in interest income since 2007. The remainder of the top five biggest losers include Chicago-Joliet-Naperville, IL-IN-WI (down $6.7 billion), Miami-Fort Lauderdale-Pompano Beach, FL (down $6.0 billion), Los Angeles-Long Beach-Santa Ana, CA (down $3.4 billion) and San Francisco-Oakland-Fremont, CA (down $2.8 billion).
It’s interesting how much money the Fed can take away simply by manipulating interest rates. Perhaps the “new” adage is right — the Fed really does hate savers.
About R.T. Young
R.T. Young, Ph.D. Business Economics
R.T. is a business economist and angel investor. R.T. spends his days doing advanced statistical analysis and writing for businesses and elected officials across the United States, Europe and Asia. In his off-time, R.T. enjoys basketball, football, baseball and most any other sport. R.T. holds a Ph.D. in business economics and a bachelor’s degree in physics.
Other posts by R.T. Young:
- What Has the Minimum Wage Done Across Time, and What Does it Have to do With Employment?
- Venture Capital: Where Will the Money Move to Next and Where Has It Been?
- Unemployment Across Time and Space: Will the State Differences Stay Around Forever?
- What matters more when it comes to moving between states: weather or taxes?
- Where Have People Gotten Richer and Where Have People Gotten Poorer?