Fed extends record-low interest rates to mid-2015 – at least

Ben Bernanke picture

If we were playing poker, I’d have to say the Federal Reserve is all in.

The Fed’s policy-setting committee met today and decided to keep interest rates at record lows until at least mid-2015.

That adds another six months to a punishing Fed policy that's making it virtually impossible for savers to earn a reasonable return on short-term investments such as certificates of deposit and money market and savings accounts.

But wait, there’s more.

The Federal Open Markets Committee also said the government-controlled bank will buy $40 billion of mortgage debt per month for the foreseeable future.

Although the Fed has bought $2 trillion dollars’ worth of government and government-backed mortgage debt since the financial crisis hit in 2008, it’s never had an open-ended commitment like this.

The Fed has always set strict limits on how much it would spend and how long those purchases would last.

Now it appears that Fed Chairman Ben Bernanke and his colleagues are determined to pull every financial lever at their control to boost our slow-growing economy and create more jobs.

Or, as their wonkish statement put it: "If the outlook for the labor market does not improve substantially, the committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability."

If that’s not pushing your pile of chips to the center of the table, I don’t know what is.

The jobless rate has been stuck above 8% even though the terrible recession of 2009 ended more than three years ago.

In August, job growth slowed sharply. Employers added just 96,000 jobs, down from 141,000 in July and well below what is needed to bring relief to the more than 12 million who are unemployed.

The unemployment rate did fall from 8.3% to 8.1%, but that was primarily because so many discouraged workers stopped looking for jobs and were no longer counted as unemployed.

If the Fed’s projections are correct, it will have the nation’s Gross Domestic Product growing by 3.0% to 3.8% a year by mid-2015, and the jobless rate will be back below 7%.

At his post-meeting news conference, Bernanke suggested that it's wrong to fault the Fed for trying to get the economy moving again.

“The weak job market should concern every American," he said. "High unemployment imposes hardship on millions of people, and it entails a tremendous waste of human skills and talents.”

But the Fed's been pursing a devastating policy for all of those savers (often seniors) who need reasonable interest rates (think 3% to 4%) to keep a roof over their heads, food on the table and maintain a modest and dignified standard of living.

The Federal Reserve influences how much we make on our deposits by setting what's called the federal funds rate — the interest rate banks pay to borrow money that other banks have on deposit with the Federal Reserve.

It's been essentially zero since December 2008, and now the Fed says it will continue to provide the nation's commercial banks with all the money they need, essentially for free, for almost three more years.

Since the government-controlled bank adopted that policy, the banks haven't needed to pay consumers for their deposits, cutting the return on those accounts to nearly nothing.

Bernanke contends this sacrifice is worth it.

In "general, healthy investment returns cannot be sustained in a weak economy," he said during his news conference. "And, of course, it’s difficult to save for retirement or other goals without the income from a job. Thus, while low interest rates do impose some costs, Americans will ultimately benefit most from the healthy and growing economy that low interest rates help promote.”

But most savers would argue that they're being unfairly singled out and forced to live on less for a very long time.

Look at what’s happened to the average return on the most popular CDs since the federal funds rate was cut to 0% on Dec. 16, 2008.

Average CD Rates, 2008 vs. Today

  • Term

    December 2008 (APY)

    September 2012 (APY)

    Record Low

  • 3-Month CDs




  • 6-Month CDs




  • 1-Year CDs




  • 2-Year CDs




  • 3-Year CDs




  • 5-Year CDs




  • Record rates refer to the lowest rates recorded in Interest.com’s weekly survey of major banks and thrifts.Source: Interest.com survey of Sept. 12, 2012

Here's how that has devastated the earnings power of the typical saver.

If you had $10,000 invested at 3.13%, the average return on 60-month CDs in late 2008, you would have earned more than $300 a year.

Invest that same $10,000 at 1.01%, the average return on 60-month CDs today, and you'll make just over $100 a year.

With the average return on all six of those CDs reaching new record lows this month, savers who must replace maturing CDs will be suffering from the Fed's policy for years to come.

Indeed, the very best deals you'll find at banks and credit unions don't come close to the average rates savers could earn three years ago and can't keep up with the very modest inflation we've been experiencing.

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