bank rates

Fed Tiptoes Toward Higher Interest Rates

We need to be “patient” for a few more months, but the day interest rates finally start to climb for CDs, money market and savings accounts appears to be getting closer.

That’s the signal the Federal Reserve, the nation’s central bank, seems to have sent with its latest policy statement, released today.

Such is the power of the Fed that the reason for optimism revolves around the change of just a few words in the statement.

Here’s what’s happened:

For six years, the Fed has kept interest rates at record lows to spur growth while it worked to pull the economy out of the recession and its aftermath.

As it looked forward, the Fed’s rate-setting committee regularly issued statements saying it expected to keep interest rates near zero for “a considerable time,” which economists took to mean at least six months.

In December, the central bankers added additional language to the statement, saying they could be “patient” when it comes to raising rates.

At a news conference, Fed Chair Janet Yellen said “patient” meant at least two committee meetings – or less than six months.

Today, the committee kept “patient” but dropped “considerable time.”

Figuring out what the Fed means by such small changes in wording can get perilously close to reading tea leaves.

But this change most likely indicates the central bankers believe the U.S. economic recovery is strong enough that it won’t need to be propped up by keeping the cost of borrowed money low that much longer.

Interest rates could begin to inch higher in either mid-summer or early fall.

That’s good news for savers. And it can hardly come too soon.

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.

That rate has been essentially zero since December 2008 – the longest period in the Federal Reserve’s history.

The Fed actually hasn’t increased rates in a decade.

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, before rebounding slightly the last two months. It still sat at only 0.686% in November.

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

Savers responded to record-low returns by dramatically reducing the amount of money they have invested in certificates of deposit, from $1.45 trillion dollars in early 2009 to just over $500 billion today.

Many banking analysts have expected the Fed to make a policy change for the last couple of months, reflecting a U.S. economy that finally seems to be doing well.

The U.S. Labor Department recently reported that the U.S. added 252,000 jobs in December, the 11th-straight month of job gains above 200,000.

The unemployment rate fell another two-tenths to 5.6%.

Wages have been the weak spot in the recovery. But paychecks, too, are starting to show modest gains.

In 2014, average hourly earnings rose 1.7%, the Labor Department said.

Overall, the picture appears brighter for the U.S. economy than in a very long time.

Unfortunately, however, much of the world continues to struggle.

Europe, in particular, remains deeply troubled, with high rates of unemployment and largely stagnant economies in several countries.

The global uncertainly may explain the Fed’s reluctance to move more boldly.

But by removing “considerable time” from its projection of how long rates could stay low, the Fed is saying it does see progress and reason for hope.

Expectations are that once it begins increasing rates, the Fed will boost them a quarter of a point at each of the eight meetings it holds per year.

An official survey taken in December found that 15 of the Fed’s 17 governors thought the fed funds rate would be raised sometime in 2015.

The majority expected it to be just over 1% by the end of the year and reach a target rate of 3.625% by the end of 2017.

That day remains two years away, and much could happen between now and then.

But for now, savers would probably just be happy to see interest rates start heading in the right direction.

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