Interest Rates and Savings in Hampered Markets

And you thought it was only in movies
As you wish all your dreams would come true
It ain't the first time believe me, baby
I'm standing here feeling blue
--Led Zeppelin

In the Q&A session following her first "Humphrey-Hawkins" testimony before Congress, new Fed chair Janet Yellen apparently said (I can't find a Q&A transcript) that interest rates on bank instruments like savings accounts and CDs were low because there is excess savings in the economy relative to demand.

In unhampered markets, this is likely to be true. High supply of savings relative to demand would reduce the price of credit and encourage more borrowing.

In the current market environment, however, interest rates are not moving freely based on savings supply and demand. Interest rates are instead being suppressed by Fed interventions. Central planners are trying to fool markets. By forcing interest rates below market, they are sending a false signal to market participants that savings are more abundant than they really are in attempt to elevate consumption in the here and now.

This is a foolish thing to do in an economic environment that already lacks savings. High interest rates that would naturally occur in this environment would be encouraging people to save more. The resources that people set aside would provide capital formation for future investment.

Artificially suppressed interest rates discourage savings at precisely the time that people should be building savings. By consuming ever more of today's production and saving ever less, we engage in capital consumption. Capital consumption hamstrings future productivity growth which, in turn, restricts future standard of living.

Yellen's remarks reflect a lack of economic understanding that is unfortunately all too common among the Federal Reserve bureaucracy.