bank rates

Fed Stays The Course On Interest Rates

The day when your CDs, savings and money market accounts once again earn a decent rate of interest remains a “considerable time” away.

That’s the message from the latest policy statement issued by the Federal Reserve, the nation’s central bank, on Wednesday.

The Fed has kept interest rates near record lows for six years while working to get the struggling U.S. economy back on its feet.

As it has peered into the future, the Fed has regularly issued a statement saying the economy remains weak enough that it expects to keep interest rates where they are for a “considerable time.”

But with the economy now clearly picking up steam, the Fed was widely expected to strike those two words from its policy statement following its last rate-setting meeting of the year – signaling it was prepared to start to slowly increasing interest rates, probably beginning next June.

Instead, the nation’s central bankers reaffirmed the phrase even as they added new language: “Based on its current assessment, the Committee judges that it can be patient” in deciding when to raise interest rates. That, the statement noted, is “consistent” with its position on waiting a “considerable time.”

The Fed’s caution comes despite strong evidence of surging economic growth.

The U.S. Labor Department reported that the economy added 321,000 jobs in November, the 10th straight month of job gains above 200,000.

Wages also strengthened more than expected, according to the report.

However, the unemployment rate remained the same at 5.8%, which is still short of full employment, a goal of the Fed’s.

And although average hourly wages went up in October, according to the Labor Department, they have remained essentially flat through most of the recovery.

Continuing economic troubles in other parts of the world – particularly Europe, which has yet to mount a sustained recovery from the recession – may also have played a role in the Fed’s caution.

Despite today’s statement, the Fed does foresee raising interest rates – eventually.

The most recent projection by Fed officials, made in September, said they thought it most likely the federal funds rate, which establishes the cost of short-term credit, would be 3.75% by the end of 2017.

The central bank has been holding that rate near zero since December 2008, the longest stretch in its history, as it worked to pull the nation out of the recession that began with the housing market collapse.

It’s actually been a full decade since the Fed raised interest rates.

Keeping the federal funds rate at rock bottom was only one of several steps the Fed took as it tried to encourage investment and spending to pull the economy out of its doldrums.

Those steps also had the effect of reducing the interest rates banks paid for savings and other accounts.

To simplify, 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.

The interest rate for CDs, in particular, follows the federal funds rate very closely.

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, before rebounding slightly to 0.671% in October. Back in December 2008, when the fed funds rate was lowered to zero, it was four times more – 2.757%.

Today’s announcement means CD, savings and money market account rates are likely to stay where they are until at least late in 2015.

Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, told reporters earlier this month, “The decision [to raise rates], when it comes, will be historic.”

For Americans who have watched their savings accounts and CDs earn 1% or even less for more than half a decade, it will certainly feel that way.

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