bank rates

Fed Sets Clock Ticking Toward September

In a widely expected move, the Federal Reserve’s policy-setting committee shied away from raising interest rates today.

If you’re counting at home, that makes 68 straight months – since December 2008 – that Fed policy has sought to keep interest rates at record lows.

But the government bank charged with managing the nation’s money supply appears to be approaching a turning point.

The committee’s July meeting may be the last one before the nation’s central bankers finally begin inching rates upward.

It doesn’t meet in August, but if the Fed holds to its long-term projections, the pressure to increase rates in September now looms large.

For personal savers, that means our certificates of deposit, savings and money market accounts will start to earn a little bit more interest.

It’s not going to be much, and the road ahead is still a long one.

However, it would be the first step toward returning to what used to be considered normal returns for such savings.

In a policy statement released today, the Fed committee noted that the data it has gathered in the last month “indicates that economic activity has been expanding moderately in recent months.”

The central bankers also noted, “The labor market continues to improve, with solid job gains and declining unemployment.”

Combined with little indication that inflation is increasing, the statement is a generally positive look at the state of the U.S. economy.

Nothing in the release indicates the Fed sees a reason to change its long-term view that the economy is improving and it can start to raise rates this year.

Fed Chair Janet Yellen has stated that the process of raising rates is likely to be gradual, as the Fed moves carefully to make sure it doesn’t hurt the economic recovery.

In addition, a majority of the Fed’s governors have said they expect to raise rates once or twice this year.

Finally, an internal analysis by the Fed’s staff that was accidentally made public earlier this month also foresaw rates increasing this year, although possibly more modestly than the governors’ estimates.

When you put all this together, a September rate increase becomes likely, especially if the Fed hopes to nudge rates up twice this year while still taking a gradual approach.

Unfortunately for savers, “gradual” also means that it’s still going to be several years before interest rates return to the level they were at before the recession that began in 2007.

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 the end of 2008 – the longest period in the Federal Reserve’s history.

The situation is a legacy of the global recession, which was spurred by reckless mortgage lending.

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 0.687% this May.

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

The first increase in the federal funds rate, whether it comes in September or later, is expected to be a quarter of a point.

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

Similarly modest rate increases would then occur every couple months or so.

The most recent survey of Fed governors 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.

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

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.

In a June press conference, Yellen acknowledged, “From the point of view of savers, of course, this has been a very difficult period. 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.”

That “very difficult period” is not going to change in July.

But savers can take heart in the fact that September could very likely be the beginning of a better day.

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Comments (1)
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One Existing Comment
  1. A.Bundy said:
    on July 31st at 08:04 am

    i wonder what excuse these rat bastards will use in September to not increase the interest rate? in 1980, the federal funds rate was 13.35%. if i had then what i have now, i’d be livin’ large, me and my homies, making six figures just off the interest. who would even care about IRA’s with that kind of return? i’d invest in nyc’s ghetto real estate before it became a billionaire’s den. but back then, i was a kid with a single crackhead parent and $hit poor, so the high interest rate meant nothing when you had nothing in the bank.