Bernanke’s Plan To Raise Rates – Someday

Ben Bernanke has unveiled his plan for unwinding the Federal Reserve’s economy-boosting policy that’s driven interest rates to record lows.

When the Fed Chairman might set that plan into motion remains a mystery.

Economists who thought June might be a good guess are now saying November or even next year since he seems determined to hold interest rates ridiculously low for as long as he possible can.

The plan also has a surprising twist that makes us worry about how quickly the horrible rates on CDs, savings and money market accounts will improve after the Fed finally decides to act.

For more than three decades the Fed has controlled short-term interest rates through what’s called the federal funds rate — the rate it allows commercial banks to charge one another for overnight loans.

Lowering that rate to 0% certainly played a big role in driving interest rates on loans and consumer deposits to the record lows we’re seeing today.

But Bernanke says he’s going to reverse that process by boosting the interest rate banks are paid for keeping excess reserves on deposit with Fed, which is currently 0.25%.

Increasing that rate would supposedly give the banks more incentive to keep their money parked at the Fed, reducing the amount they have to lend and driving up the rates for all sorts of consumer and commercial loans.

Raising any of the Fed’s short-term interest rates would supposedly lead to higher interest rates on all types of deposits.

But we’re about to enter uncharted territory here, and no one really knows how much, or how fast, an increase in the Fed’s rate on excess reserves will trickle down to savers.

In our opinion, allowing us to earn a reasonable return is pretty important given the beating we’ve taken from the Fed’s current policy.

Average returns on 3-month, 6-month, 12-month and 24-month CDs crashed to new record lows in this week’s Bankrate survey.

Let’s not kid ourselves.

Bernanke has done everything he can to save the big banks from their own irresponsible lending by denying millions of hardworking Americans anything approaching the market rate their savings deserve.

Thanks to the Fed’s policy Chase Bank can pay a pitiful 0.05% APY on its savings accounts while JPMorgan Chase Chairman and CEO Jamie Dimon took home $17.6 million in total compensation last year.

Does that seem fair? No it does not.

Now Bernanke seems more concerned about pulling the $1.1 trillion the Fed pumped into the economy to fight the recession before that stimulus causes inflation to soar out of control.

We can only hope that savers aren’t the last to benefit from Bernanke’s plan to return the economy to a more normal, market-driven state of affairs.

Whenever that may be.