bank rates

Cautious Fed Passes On January Rate Hike

To the surprise of almost no one, the Federal Reserve left interest rates unchanged at the January meeting of its rate-setting committee Wednesday.

In December, the nation’s bank for banks ended a record seven-year run of holding short-term rates near zero when it raised a key interest rate by a quarter point.

That modest increase was long-awaited good news for savers, who have seen the average return on everything from certificates of deposit to personal money market and savings accounts languish near zero.

It was a critical first step in the Fed’s long-stated policy of eventually getting the federal funds rate from virtually 0% up to 3.5%. That rate, which determines what commercial banks pay to borrow money through the Fed goes a long way in determining other interest rates.

But Fed Chair Janet Yellen stressed then that the Fed would proceed deliberately with further increases.

The statement released after the meeting gave no indication of when the next rate hike might occur, although it made clear that the Fed’s cautiously optimistic view of the economy has not substantially changed.

The Fed’s rate-setting committee meets eight times a year, and a survey of Fed governors in December indicated most expected to proceed with a quarter-point move every other meeting in 2016.

But the New Year began with a steep decline in financial markets around the world fed by concern about falling oil prices and an economic slowdown in China. Some analysts believe the global financial jitters mean it’s likely the Fed will only raise rates a couple of times this year.

However, the U.S. economy continues to be a bright spot amid the uncertainty, showing steady growth, adding 2.65 million jobs last year to bring the unemployment rate down to 5%.

In Wednesday’s statement, the rate-setting committee said it is “closely monitoring global economic and financial developments,” but remains focused on conditions in the U.S. labor market and the U.S. inflation rate, which continues to run below the Fed’s target of 2%.

Overall, the Fed statement made clear it continues to take the long view and is not overly concerned with the recent swings in global financial markets.

Although the Fed’s December move was expected to nudge certificates of deposit and other savings rates at least a little higher, the response so far has been underwhelming.

The yields at most banks remain largely unchanged.

The average return on certificates of deposit haven’t budged over the past month in Bankrate’s weekly survey. Or, in the case of 5-year CDs, has actually fallen slightly.

Seven years of Fed policy that kept rates at rock bottom seems to have created a psychology that will be hard to shake.

It may take two or three rate hikes to spur banks to follow the Fed’s lead and meaningfully boost rates on CDs, money market and savings accounts.

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 0.644% in November of last year, 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 $420 billion today.

The Fed started the down the road toward higher interest rates for long-suffering savers last summer, but it seems clearer than ever that road is likely to be a long one.

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