bank rates

Fed: No Good News On Savings Rates

rate arrow crashing down.The Federal Reserve isn’t planning on doing anything anytime soon that will move the interest rates on CDs, money markets and other consumer savings options beyond their rock-bottom levels.

In fact, don’t expect those interest rates to return to their old levels until several years from now.

That was part of the message delivered by the nation’s central bank when it surprised the experts Wednesday by announcing it wasn’t ready to start backing off its effort to boost the economy quite yet.

The Fed has two ways it is working to help the economy climb out of the worst downturn since the Great Depression.

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 second tool the Fed has in its arsenal: its ability to impact short-term interest rates when it sets something called the “federal funds rate.”

The Fed has been effectively keeping that rate at zero as part of its effort to bolster spending through easy money.

And for years, the central bank has routinely moved the target that savers have to look to for when rates might finally rise.

On Wednesday, Fed Chairman Ben Bernanke did it again.

“The first increases in short-term rates might not occur until the unemployment rate is considerably below 6.5%,” he said.

That’s a significant, if not formal, change from last December, when the Fed’s rate-setting committee first noted it wouldn’t start raising interest rates “as long as the unemployment rate remains above 6.5%.”

That’s the official line from the Fed. It did not change, unlike Bernanke’s language.

A majority of the committee doesn’t expect any increase in the federal funds rate to take place until 2015, and two members did not think there will be an increase until 2016 — three years from now.

Even then, Bernanke said, most committee members “see the funds rate target rising only very slowly.”

By the end of 2015, the rate-setting committee members predicted a rate of just 1%. Speaking to the press after the announcement, Bernanke said he thought a return to traditional rates could be “several more years” down the road.

That’s a signal we all have much longer to wait until we get fair returns on safe investments.

As for the asset purchases, last spring, the Fed said it saw enough signs the economy was improving that it expected to be able to start scaling back later this year. It was widely expected to announce the beginning of those cutbacks Wednesday.

Instead, the Fed’s rate-setting committee essentially decided conditions were still too uncertain to begin bowing out right now.

“We want to make sure the economy has adequate support,” Bernanke said. “The intention is to wait a bit longer and get confirming evidence that the economy is in fact conforming to the general outlook that we have.”

Although Bernanke said it was still possible the Fed could begin to reduce its purchases by the end of the year, he appeared to back off from the Fed’s earlier statements that this was likely.

He also stepped back from an earlier assertion that the Fed would end the purchases completely when unemployment reached 7%, which the Fed had projected for next year.

“There is not any magic number we are shooting for,” Bernanke said. “We are looking for overall improvement in the labor market.”

In many ways, the Fed’s announcement today can be seen as prudent. It means the nation’s central bankers recognize that the economic recovery is fragile and they need to do all they can to help it along.

It also means that Fed recognizes, as Bernanke stressed, that unemployment still remains significantly too high and a priority must be placed on getting people back to work.

But for personal savers, today’s announcement means the day when CDs and other savings options actually are earning a real return still glimmers in the distant future.

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  1. L Mowery said:
    on September 23rd at 05:28 am

    This is a terrible time for Sr.Citizens trying to supplement their social security income. The low savings, CD rates are killing seniors with no way to make a few dollars on their savings. How does Bernanke think we can survive on these low rates until 2015. I can’t believe more Seniors are not complaining.