Who loses when Fed keeps interest rates low?

“Nor, to my knowledge, have key administration officials or members of Congress. Yet interest rates close to zero are causing considerable distortions and, for many, outright harm.”

I'M amazed that Federal Reserve Chairman Ben Bernanke has emphasized the beneficiaries of low interest rates and has never bothered to mention the losers. Nor, to my knowledge, have key administration officials or members of Congress. Yet interest rates close to zero are causing considerable distortions and, for many, outright harm.

Think about savers who are receiving trivial returns on their bank and moneymarket accounts. Those returns would be negative if fund managers weren't waiving fees. Furthermore, free checking accounts are disappearing. Banks and thrifts, facing low interest earnings, have increased the size of the required balance on checking accounts that pay no interest to $723, on average, up 23 percent in the last year.

The average fee on non-interest checking accounts jumped 25 percent to $5.48 per month, also a record. The percentage of non-interest checking accounts that are free of charges dropped to 39 percent from 76 percent in 2009.

Many savers also are deserting money-market funds for the safety of accounts covered by the Federal Deposit Insurance Corp. This is shown by the collapse in M2 velocity of money. The ratio of M2 to gross domestic product indicates that money is just sitting in accounts, despite returns that are almost zero in nominal terms and distinctly negative returns in real terms.

In addition, the European Central Bank announced in July that it would cut its deposit rate for banks to zero and its benchmark lending rate to 0.75 percent. With rates this low, managers of European money-market funds totaling $60 billion have closed their funds to new investors. Many were already offering returns of less than 1 percent.

Will Americans be discouraged by low interest-rate returns and save less, or will they save more to reach lifetime goals? I believe the latter, which is one more reason why I expect the householdsaving rate to climb back to more than 10 percent. At the same time, low interest returns in conjunction with volatile stock and huge losses on owner-occupied houses are forcing many vastly undersaved baby boomers to work well beyond their expected retirements; another distortion. Sure, better health care for seniors and increasing life spans are also factors, but the percentages of men and women over 65 and in the labor force are rising rapidly. And as senior citizens retain their jobs, there are fewer openings for younger people and less advancement for those in between.

The Fed intends to keep short-term interest rates close to zero through 2015, and probably longer as deleveraging keeps the economy subdued and unemployment high. So what can savers do? Hope for deflation, which will push real interest rates from negative to positive?

Banks are also suffering because of close-to-zero interest rates, even though financial institutions are paying next to nothing on deposits, which continue to swell as savers stampede for liquidity and safety. One serious problem is the relatively flat yield curve. It is anchored by zero federal funds rates on the short end and pushed down for longer maturities, at which banks normally lend, by declining Treasury yields.

Bank yields on assets are in a distinctly downward trend, which will no doubt persist as the Fed continues to keep short rates at zero. U.S. banks also have considerable exposure to the sovereign-debt troubles in Europe. Of their total foreign exposure, 24 percent is in the euro zone; 44 percent if the U.K. is included. European banks are in considerable danger because of their large holdings of such government debt.

Insurers, too, have been hurt by low interest rates, especially life-insurance companies whose cash-value policy and annuities are basically savings accounts with insurance wrappers.

Insurers largely invest in bonds, mortgages and related securities, and declining yields on their portfolios are forcing them to cut benefits, design less generous policies and raise prices where competition allows.

These conditions will last for years as maturing, higher-yield securities are replaced by lower-earning obligations.

Pension funds, especially vastly underfunded state and local defined-benefit plans, are probably the most severely hurt by chronic low interest rates. Corporations have been shifting to 401(k) and other defined-contribution plans and away from defined-benefit pensions, but the latter are uncomfortably underfunded, especially with low interest rates and muted investment returns in prospect. One study found that 42 companies in the Standard & Poor's 500 Index may have to contribute at least $250 million each this year to make up for pension-funding shortfalls.