The Fed Says Interest Rates Won’t Rise Until 2014: What’s Next For Savers?

What the Federal Reserve said Wednesday shouldn’t come as a surprise.

Ben Bernanke and company telegraphed it for weeks.

But that doesn’t make the words hurt any less: The Fed expects to keep interest rates at record low levels “at least through late 2014″ in an effort to boost an economy still hurting from the 2008 recession.

That’s a full 18 months longer than savers had come to expect.

And there’s no guarantee the rates will increase even then.

Remember, we started down this path in August when the Fed’s rate-setting committee first crushed savers by announcing it would hold short-term interest rates at record lows “at least through mid-2013.”

There’s that phrase again, “at least.”

The news was devastating to anyone who depends on decent interest from their savings to pay for living expenses or pad their retirement accounts.

That’s because the Fed influences how much savers earn on their deposits by setting what’s called the federal funds rate — the interest rate that banks pay to borrow money that other banks have on deposit with the Federal Reserve.

Since December 2008, the Federal Open Markets Committee has held that rate at 0% to 0.25% in an effort to spur lending and boost the economy.

That cheap money means there’s less demand for your deposits from banks.

As mentioned, there is no guarantee the Fed will move off the 0% policy at the end of 2014.

Some members of the Fed’s rate-setting committee believe rates will remain exceptionally low beyond that date (some think rates will increase sooner), new projections released Wednesday show.

But, as Bernanke said during a press conference, a majority of the board members think they will keep interest rates below 1% through the end of 2014 with a long-run estimate showing interest rates eventually will climb to 4% to 4.5%.

If there is one thing the Fed’s first rate bombshell helped do, it set a benchmark we all could use to plan our next moves. Now we have a new benchmark — a much longer period during which we can expect terrible interest rates.

It might be helpful to look at what happened to CD rates in the wake of the Fed’s first announcement in August.

We track the top nationally available bank CD rates daily for our CD Rates Leaderboard.

As we pointed out in an earlier post, the best CD rates fell between 16% and 21% in 2011.

When it comes to several of the CD rates terms we track, much of that decline occurred in the months after the Fed announcement:

• The top 24-month CD rate declined 13% between Aug. 9 and the end of the year.
• The top 36-month CD rate declined 17.5%.
• The top 60-month CD rate declined 15%.

While we can’t predict what will happen going forward, it’s probably fair to surmise that banks and credit unions will continue to lower rates on certificates of deposits, savings accounts and money market accounts.

That’s why, when it comes to CDs, we recommend a strategy of finding the longest terms with the highest CD rates and buying now.