bank rates

Once again, the Fed says ‘not yet’ to higher rates … December last chance for 2015

The Federal Reserve seems paralyzed, and that’s bad news for personal savers.

On Wednesday, the nation’s bank-for-banks once again put off raising interest rates, extending a historic streak of 82 straight months – nearly seven years – where the Fed has held interest rates at or near record lows.

Because the Fed’s rate-setting committee isn’t scheduled to meet again until December, the Fed’s inaction means at least another two months before interest rates on certificates of deposit, savings and money market accounts begin their long climb back to a decent rate of return.

But at this point, whether the central bankers will act then is anybody’s guess.

Although the economy continues to grow and unemployment has fallen to 5.1% – signs that the nation’s economic health is strong enough to cast off the crutch of low interest rates – the Fed clearly sees other signs for concern.

In a statement, the rate-setting committee cited inflation, which “has continued to run below the Committee’s longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports.

“Market-based measures of inflation compensation moved slightly lower,” the governors noted, while “survey-based measures of longer-term inflation expectations have remained stable.”

The Fed has a target of 2% annual inflation, which it considers a sign of a strong and stable economy. But inflation has been essentially nonexistent for the last 12 months, and in September, one key measure, the Consumer Price Index, actually fell 0.2%.

The Fed also would like to see stronger wage growth, which should pick up as unemployment falls and companies have to look harder for workers. But wage growth has been only about 2% annually in the last couple of years, despite a big drop in unemployment.

The other thing that has weighed on the Fed is the overall state of the global economy, particularly a slowdown in China and other emerging economies. Should those countries continue to struggle, their troubles eventually could infect the U.S. economy.

Taken all together, you have the Fed staring at a complicated economic picture full of enough uncertainty that it remains afraid to act.

But if not now, when?

The economic struggles of China and the developing world aren’t going to disappear in the next couple of months. Inflation has defied the Fed’s expectations for some time, as have stubbornly low wages.

Many analysts thought the Fed would start raising rates late this summer or in September, which would have allowed the central bankers to make two small rate increases this year. That’s also what Fed governors were predicting as late as this July.

In a set of predictions released in September, 13 of the Fed’s 17 governors said they still expect that first increase to come this year.

Even if that still happens, the road back to normal interest rates for savers is going to be a long one.

The first step, if it comes in December, is likely to be a modest increase of 0.25% in something called the federal funds rate.

The central bank has driven interest rates to record lows by drastically reducing that rate, which is what commercial banks pay to borrow money from each other through the Fed.

The rate has been essentially zero since the end of 2008 – the longest period in the Federal Reserve’s history.

The situation is a legacy of the global recession, which was spurred by the housing market crash.

Making borrowing cheap is intended to bolster growth by making it easy for businesses to make new investments.

But when banks can borrow money basically for free, they don’t need to offer you much in the way of interest to get you to put your money in their institutions so they can lend it 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 0.639% in August, the most recent figure available.

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

No wonder the amount of money savers have in certificates of deposit has steadily fallen from $1.4 trillion dollars in late 2008 to $434 billion today.

Once they do begin raising rates, the Fed’s governors are likely to make periodic quarter-point increases in the fed funds rate over the next several years.

In their September prediction, a majority of Fed governors expected the rate to be at 1.5% by the end of 2016, 2.5% by the end of 2017 and to reach the ultimate goal of 3.5% sometime in 2018.

The last time the federal funds rate was as high as 3.5% was in January 2008. The average yield for 1-year CDs began the year at 3.51%, and the average return for 5-year CDs was 3.73%.

That’s a far cry from today’s average returns of less than 1%. And as the months go by and the Fed leaves interest rates near zero, the day rates return to those levels feels ever farther away.

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Comments (5)
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5 Existing Comments
  1. Kelly said:
    on October 28th at 04:54 pm

    Overall it’s great that the fed won’t raise rates yet and I hope they don’t do it in December either. The economy is MUCH improved since Obama became president but it’s still fragile and no where near ready for rates to increase.

  2. Planner said:
    on October 28th at 04:59 pm

    Agreed with Kelly. We’re not ready for rates to go up. Certainly my planning biz can’t handle it and I get a good sense from corporate clients that they’re not ready yet either.

  3. Planner said:
    on October 28th at 05:01 pm

    Oh but 2016 would make sense. Maybe mid-2016 after a little more stabilization. Again the events industry gives me a good pulse on the economy based on how much businesses are spending.

  4. Bill said:
    on October 28th at 08:45 pm

    The rate will be raised in December. There is no reason not to. Should have been done six months ago. The FED is always behind the curve in both directions. A .25% rise won’t cause a noticeable ripple after the initial overreaction dies down. Savers and pensioners are getting killed in favor of businesses that are being propped up by artificially low rates. If those businesses can’t survive a 2-4% increase in rates they are not viable businesses and should not exist.

  5. James K said:
    on October 30th at 09:03 pm

    Raising/changing interest rates in an election year is not wise. Curbing speculation b/c of low rates is wise. Having a larger spread between borrowing/lending rates ensures higher profits for the banks. The Fed should listen to the banks.