bank rates

Sigh … Fed Delays Raising Rates Again

For the third time in four months, the Federal Reserve decided against raising interest rates on Thursday.

It continues a record streak of 81 straight months, nearly seven years, that Fed policy has held interest rates at or near record lows.

That means long-suffering savers are going to have to wait at least another month before they see any significant increase in the returns on their bank deposits.

September was widely expected to be different at the bank-for-banks, which is charged with managing the nation’s money supply.

With the unemployment rate down to 5.1% and other critical measures of economic health showing steady improvement, the Fed seemed to have run out of excuses not to reverse course.

In a post-meeting press conference, Fed Chair Janet Yellen acknowledged that “recovery from the Great Recession has advanced sufficiently far, and domestic spending appears sufficiently robust, that an argument can be made for a rise in interest rates at this time.

“However,” Yellen said, “in light of the heightened uncertainties abroad and the slightly softer than expected path for inflation, the committee judged it appropriate to wait.”

Yellen, and the committee’s official policy statement, emphasized that the inflation rate hasn’t come close to reaching its target of 2% a year and is unlikely to do so until sometime in 2016 – and maybe not then.

Over the past 12 months, the inflation rate (based on the Consumer Price Index) is only 0.2%, with lower oil and food prices playing a big role in that calculation.

She said the Fed also remains concerned that the job market may be softer than the employment figures indicate.

“We want to see continued improvement in the labor market, and we would like to bolster our confidence that inflation will move back to 2%,” Yellen said about the Fed’s expectations.

After a volatile summer of economic problems from almost every corner of the globe, the Fed fears foreign troubles, particularly in China, will work to hold down prices and make it harder to reach the inflation goal.

“A lot of our focus has been on risks around China,” Yellen said. “But not just China, emerging markets more generally and how they may spill over to the United States.”

The Fed’s rate-setting committee also considered, but rejected, raising rates at its June and July meetings.

The bank’s governors now have only two meetings left – in October and December – to make good on their oft-stated goal to start raising rates this year.

The central bank has driven down interest rates by drastically reducing the federal funds 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 bank’s leaders argued that low interest rates were needed to encourage borrowing and rescue the economy from a financial crisis and recession caused by reckless mortgage lending.

But when banks can obtain all of the money they need from the Fed, basically for free, they can stiff savers by paying a pittance on our deposits.

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 0.643% in July, the most recent figure available.

Back in 2008, before the Fed lowered the federal funds rate to zero, it was nearly four times more – 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 $460 billion today.

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

Thirteen of the Fed’s 17 governors still expect that first increase to come this year. A majority expect it to be at 1.5% by the end of 2016, 2.5% by the end of 2017, and reach an 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, and the average yield for 1-year CDs was 3.74% and over 4% for 5-year CDs.

That’s a far cry from today’s average return of less than 1%.

Savings and money market accounts also were paying interest rates that made savers feel like they were actually being rewarded for financially smart behavior.

Savers have waited years for what the Fed calls a return to financial normalcy and what we would call a reasonable return on our bank deposits.

Thursday’s announcement means the day when the Fed starts the country back on the road to normal remains at least a month away.

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