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Aging population results in less effective monetary policy- column

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September 28
11:30 AM 2013

The US Federal Reserve announcement that it would continue its bond purchases led Reuters columnist Allison Schrager to ask why the regulator's efforts to manage the recession worked better. She said the answer could be the aging population in the US.

Older people undermined America's monetary policy because they hold the most resources. Since they have more wealth and savings, they immediately notice the wealth effect. While lowering rates increased stock prices and was designed to encourage investment in equities, this would not have its intended effect on the older population: In life-cycle investing, those nearing retirement would usually be urged to increase their bond holdings and lessen their riskier investments. Thus, they won't feel wealthier if interest rates get lowered.

Meanwhile, retirees whose wealth portfolio was comprised mainly of bonds and savings, lowered rates would be unwelcome. It would make their accounts earn less. Schrager wrote, "So the low rates may have a perverse wealth effect on older people - decreasing their consumption. As the population ages we might expect monetary policy to become increasingly less powerful, or even counterproductive.

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