In an opinion piece in The Wall Street Journal, Charles R. Schwab, chairman of Charles Schwab Corp., spelled out the grave danger that the near-zero fed funds rate poses for senior citizens.
With their purchasing power effectively eviscerated by 76%, retirees are "financially starving," Schwab said.
The Schwab founder explained that even with the inflation rate effectively at zero, an investment in a one-year CD today pays a mere 1.3%. For a commitment of $100,000, that's a paltry $1,300 in retirement income a year, down a painful 76% from the still small, but comparatively far more generous, $5,400 a retiree would have earned in 2006 when the Federal Reserve's target rate was 5.4%.
"That may not sound like much to the average Wall Street Journal subscriber, but for a senior on fixed income, that extra money improved the quality of his life," Schwab said.
Noting that Schwab serves millions of individual investors, many of whom are 65 and older, the chairman's open letter to the Fed asks the government to weigh the well-being of this constituency, as well as the importance of giving incentives for younger investors, when determining interest rates-which have now been at near-zero for the past 18 months.
"To be sure, the country's recent financial crisis required unprecedented action by the Fed," Schwab wrote. "The large banks are well on the mend. Profits are improving and they're doing just fine. Our seniors are not. Those in Washington should keep their plight in mind as they consider Fed monetary policy going forward."
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