As Ben Bernanke and the white knights at the Federal Reserve ride to the rescue of the nation's credit markets, Tampa Bay area retirees can be forgiven for holding their applause.
"It seems like the speculators are being bailed out and we savers are being left on our own," said Evan Adams, 79, a Pinellas Park retiree. He just renewed a certificate of deposit or CD at 3.15 percent interest, down from 4.5 percent. That's $13.50 less annual income for each $1,000 invested.
Retirees feel the squeeze when the Fed cuts short-term interest rates, as it did again last week. Rate cuts simultaneously fan the embers of inflation and trim yields on bank CDs and money market funds.
While lower interest rates help those borrowing money, they can penalize thrifty retirees who carry no debt.
The Fed acknowledged last week that "uncertainty about the inflation outlook has increased." However, consumers don't seem uncertain at all. The Consumer Price Index is up 4.03 percent over the past year and for many the personal inflation rate — based on how they actually spend their money — is higher.
"The worst thing is the terrible price of food. Eggs, bread, vegetables — everything seems to be going sky high," said retired railroad conductor Vincent Oliverio of Holiday. As a result, Oliverio, 84, and wife Angela, 77, have become more cautious in their spending.
"We were going to buy a new car, but we're going to hold on," he said. "We have to prioritize our purchases." They are counting on their 6-year-old Toyota Camry to last at least another year — which shouldn't be difficult since they've cut back on driving to reduce the frequency of expensive fillups.
The Fed always walks a tightrope between economic growth and inflation while simultaneously seeing to the health of the financial system. At the moment, inflation is not at the top of its priority list.
"They're fighting some big, important battles," said Scott Brown, senior economist at Raymond James Financial Inc. in St. Petersburg. "Most people don't realize the importance of the credit market in the overall economy. The Fed's pulling out all the stops in terms of trying to increase liquidity and making sure good debt stays good."
By lowering rates and lending money to banks and investment houses, the Fed is trying to make credit available to those who need it. One of many reasons that matters, Brown said, is that if people can't get new mortgages or refinance, we're headed for a new round of foreclosures and falling home prices.
But the risk is that policies that help the credit markets will make inflation worse. If people borrow more, they spend more and demand can push prices up.
In addition, lower rates make the euro and other foreign currencies more attractive than the dollar. As the dollar falls, prices rise on foreign-made items that line the shelves of U.S. retailers. Dollar weakness also contributes to higher oil (and gas) prices, which in turn leads to corn crops being diverted to ethanol, contributing to higher food prices.
The surge in commodity prices has attracted more speculators, the hedge funds and other big investors that hop from one hot market to another. They drive prices even higher, creating what many people think is a price bubble similar to the real estate bubble that let housing prices get out of hand.
The cure for inflation is higher interest rates, which put the brakes on the economy. If inflation is allowed to grow, the rate hikes needed to tame it could mean a recession that makes "the current downturn feel like a walk in the park," said University of Central Florida economist Sean Snaith.
In the meantime, rising costs and falling incomes are forcing tough choices, and not just at lower income levels.
Retired banker Jim Bedard, 71, of Palm Harbor, said he and his wife, Virginia, 56, are considering giving up their summer home near family, a mobile home on Cape Cod. Their stock market investments are down and their costs are up.
"It costs us twice as much to travel back and forth now as it did five years ago," he said. "The cost of maintaining two properties has increased and living on the Cape is much more expensive. But we have to cut back someplace and it's one of the logical places."
Helen Huntley can be reached at firstname.lastname@example.org or (727) 893-8230.