bank rates

The Fed Boldly Goes Where It’s Gone Many Times – Nowhere

Man covering his face in exasperation with his left hand

Every time it seems the Federal Reserve is about to raise interest rates, bad economic news seems to hold it back.

This month, it appears to have been primarily a May jobs report that indicated the economy had only added 38,000 new jobs, far below expectations.

Inflation also remains below the Fed’s target of 2%, a level it believes promotes healthy growth.

On Wednesday, the Fed, the nation’s bank for banks, responded to these bits of information by leaving its key federal funds rate unchanged.

For America’s personal savers, that means at least another month of suffering rock bottom rates for their certificates of deposit, money markets and bank savings accounts.

A long road ahead

Even worse, many analysts now believe the seemingly ever-cautious Fed may wait until fall, or even later, to make its next modest, quarter-point increase in the rate.

In a press conference, Fed Chair Janet Yellen acknowledged concern over the job market. After job gains averaged nearly 200,000 per month in the first quarter of this year, she said, “the pace of improvement in the labor market appears to have slowed markedly.”

Yellen also said the Fed continues to be concerned about economic affairs abroad, acknowledging, “Vulnerabilities in the global economy remain.”

Reversing course

The starker outlook marks a reversal in perspective. Only a month earlier, optimism ran high that the Fed would be about to make its second hike in the Federal funds rate in the last six months.

The first came last December, when the Fed ended a period lasting more than seven years, a historic length of time, in which it kept interest rates near zero to boost the U.S. economy.

That first step was a modest quarter-point increase in the funds rate, which sets other interest rates by determining what commercial banks pay to borrow money from the Fed.

That rate raise was expected to the first in a series of similar small increases, about four a year, that would slowly move interest rates back into normal territory.

But earlier this year, it became clear the Fed is planning even a slower course forward, raising rates by a quarter point only twice a year or so.

In March, a survey of Fed members indicated they see the federal funds rate rising to only 0.9% by year’s end, reaching 3% by 2018 and topping out at 3.3% in the long run.

Today, an updated survey found Fed members scaling down even those modest expectations, with most members predicting the rate will rise to 0.9% in 2016, 2.4% in 2018 and 3% in the longer run.

Those revisions are further discouraging news for personal savers. Yellen said they reflect the difficulty of projecting how quickly the Fed can raise rates in the current economic climate.

“We’re quite uncertain about where rates are headed in the longer term,” she said.

Yet Yellen said the Fed remains generally optimistic about its outlook for the economy.

The rate-setting committee “continues to expect that we will have moderate growth,” she said. “Two percent growth suggests healthy growth for the rest of the year.”

In fact, despite May’s relatively paltry job gains, the overall unemployment rate fell to 4.7%, although that shift was largely due to the number of people who dropped out of the job market.

The Fed’s December move was expected to start the process of nudging certificates of deposit and other savings rates at least a little higher, but the response so far has been underwhelming.

Rates today

Annual returns on most certificates of deposit, money market or bank savings accounts all remain below 1%.

Seven years of Fed policy that kept rates near zero, combined with its obvious hesitancy about future increases, has left lenders afraid to shift course.

Cost of Funds Index

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 was 0.690% in April, the most recent figure available.

Back in 2008, before the Feds 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 $393.6 billion in May.

Those numbers reflect millions of Americans who’ve turned to riskier investments while they wait for higher CD and savings account rates.

Yet it seems clear two or three rate hikes by the Fed may be necessary to spur banks to meaningfully boost rates on savings accounts and CDs.

On Wednesday, that kind of progress felt as far away as ever.

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