Are you a retiree? Small business? Pension-plan member? You need higher interest rates

We’ve been down for too long.

More and more people are venturing out again, but interest rates remain on lockdown. When they meet this week, policymakers at the Federal Reserve need to bring interest rates back to more normal levels.

The Fed lowered rates early last year in response to the pandemic and lockdowns. This monetary policy lowers income for retirees, hampers small business development, and increases risks in public pensions.

Households with a large portion of their wealth in savings accounts, particularly seniors, have made do with lower income for over a decade now. This has had the effect of lowering their discretionary spending and increasing their reliance on government-support programs. The pandemic and public policy have hurt this group doubly.

A low-interest-rate environment favors big companies and big banks. Consumers borrow easily for big-ticket purchases from large corporations, like cars and appliances, but face rising prices for everyday items from small businesses, like clothing and meals.

Under current Fed policy, the spread between short-term and long-term interest rates remains narrow, hurting community banks and credit unions. These institutions make money by borrowing through short-term savings accounts and lending at higher rates for longer terms. When this interest spread is narrow, large banks take business from their smaller competitors.

Low rates are doing nothing to create more small-business loans. According to a recent survey by the National Federation of Independent Businesses, only 1% of owners reported financing was their top business problem. Meanwhile, 42% have job openings that can’t be filled.

The Fed’s low-interest-rate policy also impairs the ability of pension programs to meet their obligations. State pension programs face the greatest difficulty if interest rates don’t rise soon. Large state and municipal pension programs attempt to overcome the low rates by moving money away from bonds to riskier investments.

The Public Employee Retirement System of Idaho is well funded, but the current valuation depends on an inflation-adjusted investment return of 4%. With long-term bonds well below this rate before inflation, PERSI and other pension funds must seek out more risky investments.

A Fed commitment to normalizing interest rates it will improve retiree incomes, level the playing field for small businesses, and reduce the risk-taking in public pensions.

It’s a good time to end the interest rate lockdown.

Peter Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa. prcrabb@nnu.edu