The reason is not inflation, whose wicked head might rise any day, but rather a more pressing issue: low interest rates consign the elderly to low returns on their savings. Hence, the Fed is starving retirees.
Indeed, interest rates are certainly low, with the average yield for one-year Treasury bills at 0.13 percent. But two points need to be made.
First, while nominal interest rates are low, so are inflation rates. Seniors are not being hit with huge increases in consumer prices. The real measure of what seniors earn on their savings is the “real” interest rate—the nominal rate minus the inflation rate.
The average real interest rate on 10-year treasuries has been about 2.5% since mid-1950, but that’s fairly misleading. The rate has bounced all over the place (see figure). The real interest rate spiked in the early 1980s as the Fed fought inflation and caused a major world recession. The U.S. (and indeed, the world) financial system nearly collapsed!
So high real interest rates are not a panacea for the rest of us, even if they would help seniors.
More importantly, there has been a secular decline in the real interest rate since the 1980s. The reason for this has less to do with the Fed, and more to do with the growing imbalance globally between saving and spending.
According to Ben Bernanke, who has devoted a lot of his staff time to this issue, we are in the midst of a “global savings glut.” That is, billions of people around the world want to save in U.S. markets. Trillions of foreign savings have flooded into U.S. markets.
Real interest rates are low because of supply and demand. Supply of capital has increased relative to demand. That has lowered the reward for saving. That is the market speaking.
There is no magic “normal” real rate of interest that seniors are entitled to.
Bernanke also notes that this situation will likely not last. Long run adjustment may take several “decades”—for the Chinese to switch to domestic consumption, for example. The Fed can certainly affect relative interest rates; but absolute real rates are also determined by market choices. So don't blame the Fed: blame the Germans and others with current account surpluses.