The Federal Reserve's efforts to stimulate the U.S. economy after the financial crisis ended up costing savers nearly half a trillion dollars in interest income, according to report released Thursday.
Since the central bank dropped interest rates to near zero at the end of 2008, savers have labored under plain-vanilla bank accounts and money market funds that have yielded close to nothing. Critics have long said the Fed's quantitative easing efforts have boosted asset prices, particularly in the stock market, but exacted severe costs across other parts of the economy.
In a landmark report, Swiss Re quantifies just how much savers and others have languished while the policy has pushed the Fed's balance sheet past the $4.5 trillion mark but failed to generate above-trend economic growth or substantial core inflation.
The reinsurance firm put the number at $470 billion in the 2008-13 period studied, so the number is likely even higher now. (Tweet this)
Swiss Re called the impact of low-rate dollar-cheapening policies "indisputable. Meanwhile, the impact of foregone interest income for households and long-term investors has become substantial."
After more than six years of the zero interest rate policy, or ZIRP, the Fed is preparing its first steps this year toward normalizing rates. Most economists and market participants expect a rate hike at either the Fed's June or September meeting, though recent weak economic numbers post a quandary.
Financial markets have come to depend on the Fed's largess, which has included three rounds of bond buying that have expanded its balance sheet, plus another round called Operation Twist, in which it bought and sold securities at roughly the same level.
Supporters of the policy say it was necessary to resuscitate the economy with liquidity after the housing market collapsed and the stock market lost about 60 percent of its value.
However, Swiss Re said the "financial repression" has taken its toll not only on savers but also on some areas of investing and insurers like the firm itself, which needed a $2.6 billion cash injection from Warren Buffett's Berkshire Hathaway during the crisis.
"Besides the impact on long-term investors' portfolio income, the consequence for capital market intermediation is not negligible either," Swiss Re CIO Guido Furer said in a statement. "Crowding out investors due to artificially low or negative yields will reduce the diversification of funding sources to the real economy, thus representing a risk for financial stability and economic growth potential at large."
An index the firm uses to calculate financial repression levels is actually off its peak from 2011-2012 despite aggressive efforts from other central banks around the world to goose their own economies through Fed-style QE. The index measures yields and their divergence from fair value, as well as regulatory issues and bank debt holdings.
"Keeping interest rates artificially low through official intervention hampers the ability of long-term investors to deploy risk capital into the real economy. It has broken the financial market intermediation channel by crowding out viable private markets, lowering the funds available from long-term investors to be used for the real economy," Swiss Re said. "Investments in infrastructure could repair this damage and address weak economic growth."
Indeed, U.S. companies in particular have used the low rates to borrow money and buy back their own shares and boost dividends, helping bottom-line profit levels but also contributing to low top-line sales growth.
earnings are now projected to be negative in the first and second quarters and grow just 0.3 percent for the year, according to S&P Capital IQ.
"Financial repression is likely to remain a key tool for policymakers given the moderate global growth outlook and high public debt overhang. Whether the costs outweigh the benefits largely depends on the ability of governments to take advantage of the low interest rate environment by implementing the right structural reforms," Swiss Re said. "So far the record for doing so hasn't been comforting."