Brexit, the British vote to leave the European Union, was bad news for America’s personal savers.
Concerns about the impact Britain’s move could have on the global economy almost certainly weighed on the Federal Reserve’s decision today not to raise interest rates in July.
The news was the latest in a seemingly endless series of events that have led the Fed, the nation’s bank for banks, to keep interest rates near rock bottom.
The latest non-action by the Fed’s rate-setting committee means that everyone with certificates of deposit, savings or money market bank accounts is once again left waiting for the day when they begin to see better rates of return.
Perhaps the most frustrating part of Wednesday’s news was that the uncertainty caused by the Brexit vote offset generally good news about the health of the U.S. economy.
The healthy U.S. economy
After a weak month of hiring in May, the government’s June jobs report found U.S. employers adding a healthy 287,000 workers to their payrolls. Unemployment was 4.9%.
Wages, which have remained relatively weak even as the economy picked up, are finally showing improvement, climbing by 2.6% so far this year.
Although inflation still remains below the Fed’s target of 2%, a level it believes promotes healthy growth, the other good news could have spurred the nation’s central bankers to action.
But in today’s global economy and financial markets, everything is connected to everything else, and the possibility of a slowdown across the Atlantic raised caution here.
When will rates rise?
In its statement Wednesday, the rate-setting committee noted that it “continues to closely monitor inflation indicators and global economic and financial developments.â€
The committee also noted the improvements in the jobs market and restated its belief that the U.S. economy remains pointed in the right direction. “Near-term risks to the economic outlook have diminished,â€ the committee noted.
The statement leaves open the possibility the committee could still raise rates later in the year.
If that happens, the move is expected to be a modest quarter-point increase in the federal funds rate, which sets other interest rates by determining what commercial banks pay to borrow money from the Fed.
At the beginning of the year, the Fed’s members predicted that they would most likely make two quarter-point increases in the federal funds rate this year.
But most analysts now believe only one is likely.
Last December, the Fed ended a period lasting more than seven years, a historic length of time, in which it kept interest rates near zero to boost the U.S. economy.
The first step was a quarter-point increase in the federal funds rate.
That rate raise was expected to be the first in a series of similar small increases, about four a year, that would slowly move interest rates back into normal territory.
But earlier this year, it became clear the Fed is planning even a slower course forward, raising rates by a quarter point only twice a year or so.
A June survey of Fed members found that most now predict the federal funds rate will rise to just 0.9% in 2016, 2.4% in 2018 and 3% in the longer run
In June, Fed Chair Janet Yellen said those expectations reflected the difficulty of projecting how quickly the Fed can raise rates in the current economic climate.
“We’re quite uncertain about where rates are headed in the longer-term,â€ Yellen said.
Interest rates today
The Fed’s indecision has meant interest rates that remain so low they feel almost nonexistent. Annual returns on most certificates of deposit, money market or bank savings accounts are all below 1%.
One measure of how little savers are being paid is the Cost of Funds Index compiled by the Federal Home Loan Bank of San Francisco. It asks banks in California, Arizona and Nevada how much they’re actually paying for deposits.
The index was 0.691% in May, the most recent figure available.
Back in 2008, before the Feds lowered the federal funds rate to zero, it was more than four times higher – 2.757%.
No wonder the amount of money savers have in certificates of deposit has steadily fallen from $1.4 trillion dollars in late 2008 to $392 billion in June.
Those numbers reflect millions of Americans who’ve turned to riskier investments while they wait for higher CD and savings account rates.
They’ve been waiting for more than seven years for the Fed to move savings rates back toward normal.
As of Wednesday, they’re still waiting.