Kocherlakota: If you're over 65, you should love the Fed

Kocherlakota: If you're over 65, you should love the Fed
If low interest rates have posed a challenge for seniors, why then have they done relatively well in terms of consumption and income?
MAR 10, 2016
By  Bloomberg
Conventional wisdom suggests that monetary stimulus is particularly bad for senior citizens: When the Federal Reserve holds interest rates low, retirees tend to get less income from their nest eggs. Over the past eight years, though, they've done a lot better than this simple logic would imply. Consider the amount of goods and services that seniors consume — an important indicator of their well-being. According to the Consumer Expenditure Survey, the average household headed by someone aged 65 or older consumed 5% more in 2014 than in 2007, adjusted for inflation. That compares to declines of 5% for all households and 7% for households headed by someone aged 35 to 44. Averages, of course, can be driven by a small number of households. That said, the apparent rise in seniors' consumption mirrors an increase in median pre-tax income: Families headed by someone aged 65 to 74 saw an inflation-adjusted gain of about 5% from 2007 to 2013, according to the most recent (2014) version of the triennial Survey of Consumer Finances. For families headed by someone aged 75 and over, the increase was 10%. By contrast, families headed by people aged 35 to 44 and 45 to 54 suffered declines of 4% and 17%, respectively. If low interest rates have posed a challenge for seniors, why then have they done relatively well in terms of consumption and income? I can think of at least four reasons: -The disappointingly slow wage and employment growth of the past decade has had less impact on seniors than on younger folks. -Seniors' social-security income rises with inflation, maintaining their purchasing power. It doesn't, however, decline when prices fall — a feature from which they profited (modestly) last year. -Many seniors own annuities or bonds that provide them with fixed payments. Because inflation has been surprisingly low, they've gotten more purchasing power from these fixed payments than they could have expected. -Seniors hold more assets like stocks, bonds, and homes than do younger folks. All of these assets have appreciated a lot over the past seven years, providing seniors with a source of spending money that offsets some of the effect of low interest rates. All this suggests that the Fed's policies over the past seven years have actually favored seniors. After all, we should assess the appropriateness of monetary policy in terms of macroeconomic outcomes, not in terms of the level of interest rates. And when we judge by outcomes, we have to conclude that monetary policy has not been appropriate for the economy as a whole, because inflation and employment have been too low. Unduly tight monetary policy has systematically shifted the distribution of resources toward people who are not working and who receive payments that are, in large part, not indexed to inflation — that is, toward retirees. The tilt of monetary policy toward seniors makes a sort of political sense. I suspect that most Fed policymakers receive relatively little input on the economy from people who are younger than 40 (this was certainly true for me when I worked there). There is also pressure from Congress for the Fed to make choices that favor seniors, as suggested by the questions legislators pose to Chair Janet Yellen. The aging of the population will be a defining characteristic of the U.S. economy for decades to come. This will probably increase the pressure on the Fed to make monetary policy choices that lead to unduly low inflation and employment. If they want the economy to achieve its full potential, policy makers must resist. Narayana Kocherlakota served as president of the Federal Reserve Bank of Minneapolis from 2009 through 2015

Latest News

Farther debuts AI investment proposal tool for advisors to win clients
Farther debuts AI investment proposal tool for advisors to win clients

"Im glad to see that from a regulatory perspective, we're going to get the ability to show we're responsible [...] we'll have a little bit more freedom to innovate," Farther co-founder Brad Genser told InvestmentNews.

Barred ex-Merrill Lynch advisor arrested in alleged $2.6M theft of former Miami Dolphin Pro Bowler
Barred ex-Merrill Lynch advisor arrested in alleged $2.6M theft of former Miami Dolphin Pro Bowler

Former advisor Isaiah Williams allegedly used the stolen funds from ex-Dolphins defensive safety Reshad Jones for numerous personal expenses, according to police and court records.

Are you optimally efficient?
Are you optimally efficient?

Taking a systematic approach to three key practice areas can help advisors gain confidence, get back time, and increase their opportunities.

Advisor moves: Father-son duo leaves Raymond James for LPL, RayJay adds Merrill Lynch alum in Florida
Advisor moves: Father-son duo leaves Raymond James for LPL, RayJay adds Merrill Lynch alum in Florida

Meanwhile, Osaic lures a high-net-worth advisor from Commonwealth in the Pacific Northwest.

Beacon Pointe adds six RIAs in two-month acquisition spree, boosting AUM by $2.7B
Beacon Pointe adds six RIAs in two-month acquisition spree, boosting AUM by $2.7B

The deals, which include its first stake in Ohio, push the national women-led firm up to $47 billion in assets.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.