On The 'Real' Financial Impact Of ZIRP

Via Chris Turner,

Determining the financial impact from Zero Interest Rate Policy (ZIRP) (or Zero Lower Bound) to responsible savers poses difficulties.  The concept seems simple; gather some background data and chart the results.  Well, not so easy.  First – one needs to gather data and unfortunately, the data rests in different databases (but that’s OK for geeky data miners that like to make calculations).  For charting and calculations, the following data sets provided information:

  1. Total Savings Deposits – FRED
  2. Average Interest Rates on Savings Deposits – FRED (M2OWN)
  3. Inerest Income – IRS tax stats, NIPA tables
  4. Effective Federal Funds Rate – FRED (FEDFUNDS)

While the omnipotent FOMC suggests they understand all, they clearly misunderstand the impact of arbitrarily lowering the Fed Funds rate.  Using data from 1964 to present (when the data sets coincide), we are able to see the historical relationship between total savings and amount of interest income earned on the savings. 


Note that prior to 2001, as savings increased (blue line), interest income received also increased (red line).  After 2001, a funny thing happened on the way to the bank – yeah, savers saved (responsible) but received less interest.  The green line shows the impact of Fed Funds rate on average savings account interest rates.

The next chart simply shows 1964 to 1986 and the rate at which savings increased and interest received increased.


Both rates move in tandem – as savings increased (except during late 70’s early ‘80s), interest increased.   As data goes – the 1982 period where interest received exceeded savings account holdings could be an anomaly in three separate sets of data or just representative of high interest rates paying large interest payments.

Scaling into the shaded area from Chart 1 representing 1986 to present, the following chart depicts the effective Fed Funds rate determined by FOMC and the resultant savings and interest during the period.


Remarkably, as savings increased when Fed Funds rate remained around 5%, interest income continued to rise.  However, post 2001, the interest income received stopped growing at the same rate.  With the exception of 2005 to 2008 when rates went back to a “normal” 5% range – the interest income earned has remained stable at 1 trillion.

The following chart rescales the previous one to better show the relationship between Fed Funds rate and the impact on savings (removed the total savings).


The chart clearly depicts that when the Fed Funds rate declines (to “stimulate” the economy), the net effect is less interest paid by banks to those responsible savers.  Let’s give credit to the FED though – from 2005 to 2008 – savers benefited.

This last chart summarizes the actual loss to savers.  Rather than using the FOMC to direct rates – what if the rates simply floated (market rate)?  Using the long run historical mean of Fed Funds rate allows a calculation of where rates “should” be without FOMC intervention.   Applying this rate to the actual savings provides a net amount savers could have earned during the last 11 years. 


While the loss to savers (shaded orange) does not match the same rate rise in savings (green line), the conservative and cumulative effect is a loss of just over 9 trillion in savings during the entire period.  This represents the current account loss of nearly 2.8 trillion as of Oct 12.  Savers could be garnering nearly three times the current amount in interest income if interest rates represented the long run historical mean.

But at least the banking system is saved.