bank rates

Fed’s Rate-Boost Time Frame Gets Muddled

rate arrow crashing down.The Federal Reserve today offered a confusing new message – alternately more vague and clearer than before – about when savers might expect a return to decent interest rates.

I’ll explain further, but the takeaway is this: The Fed probably won’t increase short-term interest rates until 2015, and they won’t return to normal levels for quite some time after that.

These expectations are unchanged from previous Fed proclamations.

But here’s how we get to both a clearer and less clear view on the future.

During a two-day meeting of the Fed’s rate-setting committee, it abandoned its 6.5% unemployment threshold for when it might increase the federal funds rate, a lending rate between banks. That rate, which influences all sorts of short-term interest rates consumers care about – like CD rates – has been set near 0% since late 2008.

This threshold was a clear way for savers to measure when rates might increase, even if the Fed has repeatedly moved the target.

Still, the threshold’s demise is no surprise. Then-Fed Chairman Ben Bernanke telegraphed this move as far back as September 2013.

But the Federal Reserve replaced the threshold with an official policy that is decidedly squishier. No mere mortal can possibly figure out when rates might increase based on this new language:

“In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress – both realized and expected – toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends …” (emphasis added)

That’s crystal clear, right?

In comes new Fed Chair Janet Yellen, who cleared things up a bit during her post-meeting press conference.

When asked to define “a considerable time,” Yellen established a time frame: Barring bad inflation or employment news, short-term rates could increase six months after the Fed stops its other effort to prop up the economy.

Since September 2012, it’s been buying massive amounts of Treasury securities and mortgage-backed bonds, a stimulus program meant to keep long-term interest rates low. But for several months now, the Fed has repeatedly dialed back its purchases and plans to end them altogether this fall.

That would put the first increase in short-term rates sometime before the middle of 2015.

Yellen emphasized, however, rates would remain “well below” historical standards for some time after that.

The long-term normal is 4%. By the end of 2016, it could be 2% or higher, according to Fed projections.

So even when rates increase, they will increase very, very slowly.

The waiting game continues.

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Comments (2)
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2 Existing Comments
  1. sam said:
    on March 19th at 03:13 pm

    “I cant define it, but I’ll know it when I see it.”

  2. SeniorSaver said:
    on March 19th at 03:42 pm

    We can expect further muddling of the message over the next week or so, as various Fed Governors and Presidents make public statements to “clarify” or “walk back” today’s confusing formulation.