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According to last week’s update of the Consumer Price Index (CPI), consumer prices in the United States increased by 5.6 percent between July 2007 and July 2008.
Meanwhile, the Federal Reserve’s funds rate — which is the rate you are always hearing about the Fed raising or lowering — has sat at 2 percent ever since the Fed’s final (so far) rate cut in April. The Fed funds rate was as high as 5.25 percent back in 2007 before the Fed began slashing rates in the wake of the mortgage crisis.
The Fed funds rate heavily influences short-term interest rates such as those paid out by bank accounts or CDs. The Fed’s rate-cutting campaign has resulted in an average savings account interest rate that is, according to bankrate.com, under 2.6 percent per year.
So to sum it up, people are able to get a 2.6 percent return (before taxes) even as they’ve watched the purchasing power of their savings decline by 5.6 percent over the past year.
It’s pretty clear that the Fed has only pushed rates so low because the speculative boom that took place in the housing and mortgage markets has now reversed so violently. The unnaturally low Fed funds is just another form of bailout — one by which savers are watching their real wealth disappear for the benefit of the housing market and the financial industry.
I’m kind of surprised more people aren’t upset about this.
— RICH TOSCANO