The Federal Reserve’s rate-setting committee announced Wednesday it will ever-so-slowly back off efforts to stimulate the economy beginning early next year, noting improving economic conditions.
But Federal Reserve Chairman Ben Bernanke made clear we are years away from the Fed ending efforts to keep short-term interest rates low.
That continues the streak of bad news for savers, who have seen yields plunge on certificates of deposit and other federally insured investments since the recession.
The Fed says it will reduce its monthly bond-buying program by $10 billion in January to $75 billion. Since September 2012, it has been buying up massive amounts of Treasury securities and mortgage-backed bonds, to the tune of $85 billion a month.
Those purchases have essentially flooded bond markets with money, helping to boost the economy by keeping long-term interest rates low.
The announcement Wednesday is just the start of a years-long process. As the Fed slows its bond purchases, that could result in higher home loan rates.
It should not have direct impact on deposit rates.
In fact, the Fed reaffirmed its policy to keep short-term interest rates low. The central bank does this by setting the federal funds rate, the interest rate the central bank allows commercial banks to charge each other to borrow money on deposit with the Fed.
The Fed has been effectively keeping that rate at zero as part of its effort to bolster spending through easy money.
And CD rates generally follow the federal funds rate, which means we’re in for more pain.
We’ve long complained that Bernanke and his cohorts keep moving the target for when rates might increase. You could argue the Federal Open Market Committee did that again on Wednesday, altering its position from late 2012 that it wouldn’t start increasing interest rates “as long as the unemployment rate remains above 6.5%.”
The committee now says “… it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent …”(emphasis added)
But that’s just formalizing what Bernanke first suggested in September after the committee met.
“The first increases in short-term rates might not occur until the unemployment rate is considerably below 6.5%,” he said at the time.
A majority of the committee doesn’t expect any increase in the federal funds rate to take place until 2015, and three members did not think there will be an increase until 2016 — three years from now.
In September, just two members put the first increase in 2016. So there’s some movement there, just not much.
But the Fed really didn’t say anything new here.
Savers had a long time to wait before the Fed’s latest meeting; they have a long time to wait after the meeting.