bank rates

Fed Finally Considers Raising Interest Rates, But Decides To Wait A Little Longer

For the first time in almost a decade, raising interest rates was on the agenda of the Federal Reserve’s policy-setting committee today.

It’s disappointing decision?

Not yet.

That means we’ll have to live with near-record-low returns on certificates of deposits, savings and money market accounts for at least another few months.

Fed Chair Janet Yellen told a post-meeting news conference that even though she sees continued improvement in the job market and other signs of a strengthening economy, “my colleagues and I would like to see more decisive evidence that a moderate rate of economic growth will be sustained.”

But an official survey released today shows that an overwhelming majority of the Fed’s leaders anticipate seeing that decisive data very soon.

Fifteen of the bank’s 17 governors say they still expect to begin raising rates before the end of 2015, and Yellen said the decision on when to do that will now be made on a “meeting-by-meeting basis.”

While that means they could act as soon as their next meeting in July, September would seem a more likely time to launch a plan that will gradually boost interest rates about 1 percent a year over the next three years.

“From the point of view of savers, of course, this has been a very difficult period,” Yellen said. “Many retirees, and I hear from some almost every day, are really suffering from low rates that they had anticipated would bolster their retirement income. This, you know, obviously has been one of the adverse consequences of a period of low rates.”

Since the start of the year, the Fed had signaled, through a series of carefully crafted statements, that it would begin considering higher rates at its June meeting.

The central bank has driven interest rates to record lows by drastically reducing what’s called the federal funds rate, which is what commercial banks pay to borrow money from each other through the Fed.

The rate has been essentially zero since December 2008 – the longest period in the Federal Reserve’s history.

The situation is a legacy of the global recession spurred by the housing market crash.

Making borrowing cheap is intended to bolster growth by making it easy for businesses to make new investments.

But when banks can borrow money basically for free, they don’t need to offer you much in the way of interest to get you to put your money in their institutions so they can lend it out.

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 hit a record low of 0.663% last September. It’s rebounded only slightly since then, sitting at only 0.68% this April.

Back in 2008, before the Fed lowered the federal funds rate to zero, it was nearly four times more – 2.757%.

Savers have responded by reducing the amount of money invested in CDs from a record $1.4 trillion dollars in late 2008 to less than $480 billion today.

Once it begins, the bank is expected to boost the fed funds rate by a quarter of a point every few months.

The return that commercial banks pay on CDs, savings and money market accounts should start going up almost immediately.

The new survey of Fed governors released today shows they expect the federal funds rate to reach 0.625% by the end of this year, 1.625% by the end of 2016 – down from 1.875% in the previous survey – and to reach their ultimate target of 3.5% sometime in 2018.

Although the actual rates banks pay is well under 0.10%, the Fed’s official target range is 0% to 0.25%. So for estimates such as this, the bank considers the current rate to be 0.1625%.

To meet those goals, the Fed would have to make quarter-point increases at two of its four remaining meetings in 2015 and at four of its eight meetings in 2016.

That makes it seem that the bankers are creating a plan to boost interest rates by a quarter point at every other meeting starting in September.

The last time the federal funds rate was as high as 3.5% was in January 2008, and the average yield for 1-year CDs was 3.74% and over 4% for 5-year CDs.

That’s a far cry from today’s average returns of less than 1%.

Savings and money market accounts also were paying interest rates that made savers feel like they were actually being rewarded for financially smart behavior.

Savers have waited years for what the Fed calls a return to financial “normalcy,” and what we would call a reasonable return on our bank deposits.

The message Wednesday was that we have to wait at least a little longer.

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Comments (3)
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3 Existing Comments
  1. A.Bundy said:
    on June 18th at 04:39 pm

    sounds like the entire cabinet needs to be replaced. incompetence still reigns supreme with the current dolts. first they release figures time and time again stating positive economic numbers that they most likely fudged since the interest rate is still at nothing, and now this nonsense. i wonder what corporations/banks/institutions are puppeteering our government officials into do this?

  2. James K said:
    on June 19th at 07:56 pm

    Why is the comment period closed within two days of posting…where this one is still “accepting” postings that are older???

  3. Mike Sante said:
    on June 22nd at 08:09 am

    James K…the answer to your question is simple…we fight a never ending battle against spammers who would clog every post with hundreds of worthless comments every day…even the best anti-spam software can’t stop them all…but some posts attract more attention than others and those are the ones we close first, even if they are relatively new…I wish we could leave the comments open permanently…Mike Sante, Managing Editor