bank rates

Fed Signals It Could Be Ready To Push Interest Rates Higher As Early As June

The Federal Reserve has decided that a robust economy means it no longer needs to be “patient” about raising interest rates.

But don’t get too excited. The nation’s central bankers want you to know that doesn’t mean they’re necessarily in a hurry.

By dropping the word “patient” from the policy statement released after today’s meeting of its rate-setting committee, the Fed cleared the way to begin pushing interest rates up as early as June, but it is not committed to doing so.

“Just because we removed the word patient from the statement doesn’t mean we’re going to be impatient,” Fed chair Janet Yellen said at a press conference following the announcement.

Once the central bankers start nudging rates higher, the return savers get on their certificates of deposit, money market and savings accounts should also start to rise.

That move will feel long overdue to millions of Americans who’ve watched their savings languish for more than six years as the Fed has kept rates low to bolster the economy.

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.

When banks can borrow money for basically free, they don’t need to offer you much in the way of interest to get you to put your money in their banks so they can lend it back 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% in September. Although it’s rebounded slightly since then, it still sat at only 0.698% this January.

Back in 2008, before the Feds 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 just over $500 billion today.

When it begins increasing that rate, the Fed now expects to proceed much slower than previously indicated.

A survey of the 17 Fed governors shows they expect the federal funds rate to be just below 1% by the end of this year, just below 2% by the end of 2016, and to reach their ultimate target of 3.75% sometime in 2018.

As the economy has gained strength, savers have wondered when the central bankers would start that process.

On one hand, the latest jobs reports showed the economy added 295,000 jobs in February – the 12th straight month to create more than 200,000 jobs – and the unemployment rate fell to 5.5%.

That’s the kind of growth that warrants higher interest rates.

Wages, however, have been much slower to show improvement, rising only 2% percent over the last year. Europe’s economy is teetering on the verge of recession and deflation – a period of falling prices that’s considered much more dangerous than runaway inflation.

That argues for caution.

In its regular statements over the last few years, the Fed had said it expected to keep rates low for a “considerable time.”

In the last couple months, it subtly shifted its language, adding that it could be “patient” when it comes to raising rates and then dropping “considerable time.”

When asked to explain the shift, Yellen said that “patient” meant the Fed wouldn’t raise rates at its next two policy meetings.

If the Fed hadn’t dropped the language in its March statement, July would have been the earliest possible meeting at which the Fed could have started raising rates.

September also would have been likely. (The rate-setting committee doesn’t meet in August.)

Dropping “patient” signals that the central bankers believe the economy is strong enough they may not want to wait that long.

In the statement, the rate-setting committee said raising the federal funds rate “remains unlikely at the April meeting” but pointedly did not say anything about June. The statement also said the change “does not indicate that the Committee has decided on the timing of the initial increase” in the federal funds rate.

That means the Fed will now be weighing a rate increase on a meeting-by-meeting basis.

This is a significant change from six years’ worth of statements that made it clear that higher rates weren’t on the table and wouldn’t be considered anytime soon.

Taken all together, it’s a sign that interest rates are likely headed up for CDs and personal savings accounts by this summer, or fall at the latest.

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