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Old money: How the Fed’s actions harm millennials

June 8, 2015

By Diana Furchtgott-Roth and Jared Meyer


In our new book, Disinherited: How Washington Is Betraying America’s Young, we show how government policy is biased towards older people and creates an environment that systemically works against young Americans. In monetary policy, too, Washington is playing favorites and the young are the losers. They do not benefit from the decline in mortgage rates because they cannot afford home ownership. The slow economy has driven up their unemployment rates and lowered their labor force participation rates.

Even though the Federal Reserve ended its massive bond purchases in late 2014, interest rates remain near zero, where they have been held since late 2008. Low interest rates remain even though the economy has met all the guidelines set out by former Fed Chair Ben Bernanke. The unemployment rate is 5.5 percent and inflation is around 2 percent.

The Fed believes that if it can keep long-term interest rates low, business investment and consumer spending will increase and the economy will grow. But Fed policies have resulted in GDP growth of only 2 percent, hurting new entrants to the economy, the young. The Fed’s role should be to execute sound, consistent monetary policy through a rule such as the Taylor Rule, which would provide the backdrop for a strong economy.

We spoke with Charles Calomiris, a member of the Shadow Open Market Committee and Columbia University professor. He told us that the Federal Reserve’s extended efforts to keep nominal short-term interest rates near zero are jeopardizing America’s future. The Federal Reserve’s guiding principle should be to promote long-term price stability, as it was during the Volcker and Greenspan Chairmanships, which in turn sets the stage for economic growth and increased employment. The Federal Reserve should have started to raise rates years ago, which would have reduced the risk of accelerating inflation as rates inevitably rise.

A slow economy disproportionately affects new entrants to the labor force. Existing workers hold on to their jobs, and new openings remain scarce. Data released by the Bureau of Labor Statistics on June 5 show that the unemployment rate for 20- to 24-year olds in May was 10.1 percent, compared to 4.5 percent for those 25 and over. The teen unemployment rate was 17.9 percent.

In new Brookings Institution working paper, authors Matthais Doepke and Veronika Selezneva, both of Northwestern University, and Stanford University Professor Martin Schneider argue that Federal Reserve policy has benefitted middle-aged, middle-class households. These are the Americas who are most likely to have large mortgages that they can refinance at lower rates.

The Fed’s policy makes it difficult for young people to get mortgages, and they have missed out on the increase in housing prices. Housing is one asset class that has seen inflated values due to the Federal Reserve’s policies. But the young do not own houses. Buying a home is too expensive, especially with poor employment prospects. Adding to this, the average student loan borrower owed $27,000 at graduation, according to the New York Federal Reserve.

In the first quarter of 2015, homeownership for Americans 35 and under declined to 34.6 percent, down from 36.8 percent in 2013 and the lowest on record since the Census Bureau’s Housing Vacancy Survey began tabulating homeownership by age in 1982.

Another type of asset that has risen due to the Fed’s policies is equities, and the stock market’s performance has increased the value of pension plans and retirement accounts. Individuals and asset managers are moving into the stock market in search of higher returns, driving up equities. But young Americans have not had the chance to accumulate retirement accounts, nor have they worked long enough to qualify for pensions. Less than one-third of households headed by a person under 35 years old have any type or IRA, compared with half of households headed by a person between 55 and 64 years old.

Monetary policy history shows that whenever interest rates remain too artificially low for too long, distortions in financial markets arise, along with inflation. Alternatively, historical evidence shows that interest rate increases during the early-to-middle stages of economic expansions do not endanger economic growth.

The long-term effects of loose monetary policy should concern Americans of all ages—especially the young. Simply put, printing money and weakening the value of a currency does not lead to future prosperity. While some American homeowners and investors are currently benefiting from the Federal Reserve’s policies, it is the young who will inherit a poorer economy.


Diana Furchtgott-Roth is director of Economics21 at the Manhattan Institute and Jared Meyer is a fellow at the Manhattan Institute. They are the coauthors of “Disinherited: How Washington Is Betraying America’s Young,” out this month from Encounter Books. Follow Diana on Twitter @FurchtgottRoth, and Jared @JaredMeyer10