bank rates

Fed Holds Interest Rates Right Where They Are: In The Basement

The Federal Reserve once again shied away from raising interest rates Wednesday.

The decision means America’s long-suffering personal savers almost certainly won’t see a boost in today’s rock-bottom rates until at least June, when the Fed is next scheduled to meet.

What’s more, many analysts now believe the Fed, the nation’s bank for banks, may wait until as late as September to make its next quarter-point increase in a key interest rate.

In a statement released Wednesday, the Fed’s rate-setting committee indicated that it believes the U.S. economy is on solid overall ground but still sees a mixed picture.

“Labor market conditions have improved further even as growth in economic activity appears to have slowed,” the committee said. “Growth in household spending has moderated, although households’ real income has risen at a solid rate and consumer sentiment remains high.”

The Fed’s continued caution – some would say paralysis – has led to annual returns on certificates of deposit, money market and bank savings accounts below 1% in many cases.

Things were supposed to be better than this by now.

Last December, the Fed finally 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 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.

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 that the Fed is planning an even slower course forward, raising rates by a quarter point only twice a year or so.

In March, a survey of Fed members indicated they see the federal funds rate rising to only 0.9% by year end, reaching 3% by 2018 and topping out at 3.3% in the long run.

The Fed’s hesitancy comes despite evidence the economic recovery continues to be chugging along nicely.

The country added 215,000 jobs in February, continuing a six-year streak of steady gains. And the unemployment rate is 5%, which many experts believe is close to full employment.

But inflation remains below the annual rate of 2% that the Fed considers healthy, and wages have not risen in line with job growth.

In its statement, the Fed said it is also continuing to monitor international developments but indicated it is no longer as worried about the risk the struggling global economy poses to the United States.

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.

Still, all these concerns seem to be contributing to the Fed’s cautious approach, an approach that leaves U.S. savers waiting impatiently for better rates.

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

Seven years of Fed policy that kept rates near zero, 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.

The average national 1-year CD pays only about 0.28% right now, while average 5-year CDs return 0.84%.

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 0.670% in February, 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 $395 billion today.

Those numbers reflect millions of Americans who’ve grown frustrated with today’s rates and most likely turned to riskier investments.

Today’s news means their frustration will probably continue for at least the next few months.

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