The Fed Doesn't Control Interest Rates, and Retirees Know It Best

When the Federal Reserve kept its benchmark rate between 3.75 and 4 percent and two voting members favored another increase, the debate in Washington focused on whether rates should be cut or raised. But that argument rests on a common assumption: that one committee sets the cost of money for everyone.

A retiree’s bank statement tells a different story.

Near 4 percent, the Fed’s benchmark stands alongside a wide spread of real-world rates. The average savings account paid 0.38 percent in August, the average 12-month CD paid 1.71 percent, the best 12-month CDs reached about 4.35 percent in September, and 30-year mortgages have remained above 7 percent this autumn. These are not the same price. They are thousands of prices, shaped by lenders, borrowers, banks, depositors, risk, time, and the dollar’s value. The Fed’s rate is only one of them, and for most Americans it is not the one they actually pay or receive.

An interest rate is simply the price of using someone else’s money today. Like any price, it has both a payer and a receiver, and Americans generally fall into three broad groups.

The wealthy tend to fare well in either direction. When money is inexpensive, they can borrow against assets on favorable terms; when rates rise, they can move cash into Treasury bills and collect the yield. They have advisers, options, and time.

The borrowing middle class has a legitimate complaint. In January 2021, the average 30-year mortgage hit a record low of 2.65 percent. On a $400,000 loan, current rates translate to roughly $2,750 a month in principal and interest instead of about $1,600. For a young family, that is a serious strain, and it is fair to say the president has a point in arguing that it matters. Yet mortgage lenders must price decades of risk and inflation, and no committee can simply instruct them to ignore either one.

The third group is often overlooked: retirees who depend in part on what safe savings earn. Many baby boomers own stocks through 401(k)s and IRAs, but the money they rely on for monthly expenses often sits in CDs, Treasury bills, and bank deposits. At age 75, a market loss cannot easily be replaced by working another decade. For these savers, interest is income. Their experience makes clear who really determines it.

I came to the United States from India in 1982 as an exchange scientist sponsored by Johns Hopkins University, supported by a fellowship of $13,000 a year. My small savings account paid nearly 13 percent while inflation was around 6 percent. Banks paid that rate because they had to. After years of inflation, savers understood how quickly a dollar could lose value, and they demanded compensation for that risk.

Four decades later, the lesson was reversed. In 2022, consumer prices rose 8 percent, yet bank savings accounts paid almost nothing even as official rates moved higher. Banks with ample deposits had no reason to compete for more. A retiree with $100,000 in the bank lost about $8,000 in purchasing power without spending a cent.

At present, one bank may offer a savings account paying 0.38 percent while another offers a 4.35 percent CD, against inflation of 3.7 percent in September. That gap is not created by the Fed. It depends on whether the saver shops around.

My own experience runs both ways. High rates helped me when I depended mainly on salary and savings, and low rates helped later once I owned a home and investments. I do not rely on what a CD pays. Millions of retirees do.

Where Washington does damage savers is not through rate announcements but through the dollar and through federal borrowing. A weaker dollar is the surest way to reduce the value of savings. And Washington borrowed heavily during the cheap-money era as if it would never end; federal net interest costs have climbed from far below $400 billion a year to about $970 billion in fiscal 2025.

The discussion about interest rates would be more honest if it began with the retiree. Retirees can see the many rates on their bank’s website and know that no single decree sets them. What they need from Washington is neither a rate cut nor a rate hike. They need a dollar that keeps its value, and a government that stops treating savers’ money as free.