bank rates

Fed Continues Down Cautious Path On Interest Rates

The road back to higher interest rates is clearly going to be a long one.

The Federal Reserve’s rate-setting committee announced Wednesday it will not raise rates in March, signaling a long journey ahead for Americans waiting to see a decent return on their personal savings.

In December, the Fed – the nation’s bank for banks – finally took the first step down that road by raising a key interest rate by one-quarter of a point.

That step, as modest as it was, marked the first increase in rates in more than seven years, a historic length of time in which the Fed kept rates near zero to boost the U.S. economy.

December’s rate raise was expected as the first in a series of similar small increases, about four a year, that would slowly move interest rates back into normal territory.

To stay near its projected schedule, March would have been the month when the second increase was most likely to occur.

In a set of revised projections, the Fed indicated it now foresees only two quarter-point rate hikes this year instead of four – a pace certain to frustrate the nation’s savers, who’ve been waiting for years for rates to return to normal.

The Fed’s decision comes despite continuing positive news about the strength of the U.S. economy.

The country added 242,000 jobs in February, continuing a six-year streak of steady gains. The unemployment rate is only 4.9%, which many experts believe is close to full employment.

But inflation remains flat – the Fed considers an annual rate of 2% to be healthy – and wages have not risen in line with job growth.

In addition, the global economy isn’t doing as well as the United States, raising concerns that the world’s struggles could eventually drag down the U.S. economy. Weakness in China, in particular, has unsettled stock markets around the world.

Following the decision, Fed Chair Janet Yellen said the rate-setting committee’s basic view that the economy continues to strengthen is unchanged.

But Yellen acknowledged that the uncertain state of the world economy is weighing on the committee. “Global economic and financial developments continue to pose risks,” Yellen said. “Against this backdrop, the committee judged it prudent to maintain the current policy stance at today’s meeting.”

The Fed chair also indicated that there is still room for improvement in the job market, despite the low unemployment rate. “I’m somewhat surprised that we are not seeing more of a pickup in wage growth,” Yellen said.

The Fed’s decision leaves the federal funds rate – the rate that determines what commercial banks pay to borrow money through the Fed – unchanged.

In its official statement, the Fed also indicated that it is likely to move slowly in the future. “The committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate.”

Previously, a survey of Fed members indicated they expected to see the federal funds rate reach 3.5% within three years. But on Wednesday, they predicted a more modest upward trend.

The Fed’s members now see the federal funds rate rising to only 0.9% by year end, reaching only 3% by 2018 and topping out at 3.3% in the long run.

All in all, Wednesday’s news promises little relief for savers. The Fed’s move in December was expected to nudge certificates of deposit and other savings rates at least a little higher, but the response so far has been underwhelming.

The average national 1-year CD pays only about 0.28% right now, while average 5-year CDs return 0.83%.

Seven years of Fed policy that kept rates at rock bottom, combined with its obvious hesitancy about future increases, has left lenders afraid to shift course.

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

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 0.664% in January, the most recent figure available.

Back in 2008, before the Fed 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 $405 billion today.

Those numbers are unlikely to change until the Fed takes the next step in raising rates, a move that now can’t happen until April – and could come even later.

For savers, it can’t come too soon.

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