Why Retirees Should Stop Blaming the Federal Reserve

Fed policies have helped many of the same people complaining about low savings rates.

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If the fire department saved your house from burning down, would you complain that the firefighters got your carpets dirty?

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When it comes to the economy, the Federal Reserve is the fire department. The Fed has done more than any institution over the last few years to keep the economy from melting down and set the stage for a revival. It's been ugly work. The Fed has clearly made some mistakes, such as being too forgiving of banks and failing to anticipate the backdraft caused by controversial decisions made in secret back in 2008 and 2009. But without low interest rates, quantitative easing, and other Fed maneuvers, we could easily still be in a recession, if not worse.

Aggressive monetary policy involves tradeoffs, and one of them is the harm caused to savers by low interest rates. With the worst ravages of the recession fading, there are now mounting complaints and frequent news stories about the Fed oppressing people living on fixed incomes. Most of the "victims" are innocent retirees, which makes the Fed look as heartless as the vampire squid itself, Goldman Sachs.

It's obviously true that the return on investments like certificates of deposit and money-market funds is paltry these days. CD rates, for instance, have plunged from nearly 5 percent in 2007 to a fraction of 1 percent today. But at the same time, the Fed has protected and in some cases artificially inflated assets held by the same people suffering from low interest rates. On the whole, most retirees are far better off.

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One thing the Fed pays close attention to is total household net worth, which the Fed measures in its quarterly "flow of funds" report. From 2007 to 2008, total net worth plunged from $65.2 trillion to $52.5 trillion, a devastating blow to consumers' wallets. That drop came from two things: home values that fell off a cliff and steep losses in financial assets such as stocks.

One of the Fed's unstated goals has been to reinflate total net worth, which literally amounts to putting lost money back in people's pockets. And the Fed has been remarkably effective. It's hard to isolate a precise cause-and-effect relationship, but the Fed's "quantitative easing" policies since late 2007 have deliberately lured investors out of the safest investments and into riskier ones like stocks.

Here are the results: Since bottoming out in 2009, the stock market has more than doubled, one of the most powerful rallies on record. Bonds have rallied too, with U.S. treasuries returning an average of 8.5 percent in 2010 and 16 percent in 2011, according to data compiled by New York University's Stern School of Business. The total value of financial assets held by American households has rebounded from $42.2 trillion in 2008 to $49.1 billion in 2011.

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The Fed has had a harder time restoring home values, with low rates failing to trigger the sort of demand for homes the Fed would like to see. Fed officials have complained that a huge backlog of foreclosures, tight lending standards, and other factors beyond the central bank's control have stood in the way of a quicker housing recovery. The total value of real estate assets is still falling, from $23.2 trillion in 2008 to $18.1 trillion at the end of 2011. But that would arguably be worse if not for policies meant to make home buying more affordable and allow some homeowners to refinance, saving a couple hundred bucks a month or more.

The stock market gains since 2009 have come mostly from institutional investors following the Fed's lead. Many individual investors, however, were so spooked by the shocks of 2008 and 2009 that they parked their money in the safest place they could find. That was understandable, but it was also a classic investing mistake. "A lot of investors have an unwillingness to accept risk, even when it's prudent risk," says Mark Luschini, chief investment strategist for investing firm Janney Montgomery Scott. "Since 2009, the stock market has performed quite well, but a large constituency of investors has basically shunned the market."

It might be fair to fault the Fed for its typically opaque language, which left a lot of people wondering what to expect at a time of extreme volatility in the economy. In recognition of that, however, the Fed has recently pledged to be more forthright about what it plans to do.

Fed Chairman Ben Bernanke, for example, has all but said that the Fed will carry out more quantitative easing if the economy weakens. That suggests the Fed will continue to prop up stock prices if they can't stand on their own. The Fed has also said it plans to keep interest rates very low until at least late 2014. You'd have to plug your ears to miss the obvious hint: Rates on CDs, bank accounts, and the like aren't going anywhere for a while, so look elsewhere if you want to earn more than 1 percent on your money.

The Fed, of course, could get it wrong, and there are plenty of people who think inflation could escape the Fed's control, forcing it to raise rates sooner than promised or hastily back out of its easing maneuvers. But there's also a time-tested mantra: Don't fight the Fed. Even if you think it's wrong. And even if you're retired.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success, to be published in May. Follow him on Twitter: @rickjnewman.