The Dark Side Of Low Interest Rates

Percent sign over money and grind showing decline in interest rates AP / CBS

The Federal Reserve Board announced after its monthly meeting Tuesday that it is leaving interest rates unchanged from the current 41-year low of 1.25 percent.

The decision to leave interest rates low is intended to boost the economy by encouraging consumer spending. But as CBS News Correspondent Jane Clayson reports, for many Americans low rates are having the opposite effect.

52-year old Gary Thompson works harder than ever at the sandwich shop he owns in New York City. And in this economy he has to.

He's not making any money in the stock market. Even his best retirement accounts are stalled.

"I put some into CD's, some money market, but mostly my checking account," he says.

And how much interest is he earning? "Oh, not much. Maybe 1½ -2 percent at the most," says Thompson.

According to Peter Crane of iMoneynet, "Investors are actually saying: 'You know what, I got burned in the stock market, I'm getting nothing on my money fund. Give me my money back.'"

They're taking it back and just like Gary Thompson, pumping it into accounts that yield rock-bottom returns.

Deposits in savings accounts have jumped almost $500 billion this year alone. But if a bank offers safety, it can also act as a prison, locking in low interest rates and that may be hurting the economy.

That's because low interest means less income, which gives consumers less to spend.

Two years ago, the average investment earned you 6 percent interest. Nationwide, that generated $240 billion in spending power.

Today, those same investments yield just 1 percent and will produce only $40 billion - that's a huge hole in potential spending.

"The ironic thing is that interest rate cuts that were designed to spur consumer spending have had the exact opposite effect," Greg McBride of Bankrate.com.

That drop in income is hitting the elderly hard, especially those on fixed incomes living off the interest of their retirement savings.

"You're punishing the wrong people. The people who have worked hard, that have saved their money and are trying to earn a decent amount of interest safely on that money are being hurt," Crane tells Clayson.

For example, in the year 2000, a retiree could count on $15,000 a year of "interest income." Today they can expect only $3,700 - that's a 75 percent decline.

And one more reason Gary Thompson says he'll be working well into his 70s.

"I'll probably have to end up working much longer than I expected," he says.

Working longer and harder than his money is.

  • Sue Chan

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