bank rates

Fed Sticks To Low Interest Rate Pledge

CD rates will remain low.Several bits of analysis (or Wall Street wishful thinking) predicted the Federal Reserve would announce new efforts this week to drive down interest rates even further.

That didn’t happen, which in this terrible interest rate environment can be considered a win for savers.

Following its two-day meeting, the Fed’s rate-setting committee on Wednesday reaffirmed it will keep short-term rates at record-low levels “at least through late 2014.”

Some economists expected the Federal Open Markets Committee (FOMC) to extend that pledge into 2015.

As it stands, that means savers can expect interest rates on their CDs and savings accounts to remain depressed for at least another 2 1/2 years.

However, the Fed left the door open for further efforts to hold down interest rates if the economy continues to drag as it has through the last few months.

From the Fed’s post-meeting statement: “The Committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.” (emphasis added)

That means the threat hanging over savers remains very real.

The Fed influences how much savers earn on their deposits by setting what’s called the federal funds rate — the interest rate that banks pay to borrow money that other banks have on deposit with the Federal Reserve.

Since December 2008, the FOMC has held that rate at 0% to 0.25% in an effort to spur lending and boost the economy.

That cheap money means there’s less demand for your deposits from banks.

Whether or not the Fed changes its forecast again, it’s clearly still having an impact. CD rates have continued to slide since the beginning of the 2012.

The chart below shows how the best nationally available certificates of deposit on our CD Rates Leaderboard have faired this year.

DATE 1-year CDs 2-year CDs 3-year CDs 5-year CDs
Jan. 3 1.15% APY 1.30% APY 1.65% APY 2.00% APY
Feb. 1 1.15% APY 1.30% APY 1.55% APY 1.95% APY
March 1 1.15% APY 1.26% APY 1.55% APY 1.95% APY
April 2 1.15% APY 1.26% APY 1.55% APY 1.95% APY
May 1 1.15% APY 1.25% APY 1.55% APY 1.91% APY
June 1 1.15% APY 1.25% APY 1.55% APY 1.81% APY
July 2 1.15% APY 1.25% APY 1.50% APY 1.91% APY
Aug. 1 1.10% APY 1.25% APY 1.45% APY 1.91% APY

As you can see, rates have continued to fall, even if the decline has slowed. That tends to happen when you get closer to zero.

We have already lived through almost four years of artificially low rates, pushed down under the guise of making borrowing more attractive. Yet it remains difficult to get a loan, and aside from mortgage refinancing, there isn’t huge demand anyway.

Will punishing savers for any longer really do much to improve the economy?

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