The Fed: Record-low interest rates here to stay until mid-2013

Ben Bernanke picture

Savers got kicked again on Tuesday.

This time it was the Federal Reserve that delivered the blow.

The Fed's rate-setting committee decided to hold interest rates at record lows "at least through mid-2013."

That is about the worst possible news for anyone who needs a reasonable return on their bank accounts -- primarily certificates of deposit, savings and money market accounts -- to live on.

It means the Fed will continue to provide the nation's commercial banks with all the money they need, essentially for free, for another two years.

Since the government-controlled bank adopted that policy in December 2008, the banks haven't needed to pay consumers for their deposits, cutting the return on those accounts to nearly nothing.

The average yields on five of the six popular CDs we follow have fallen to record lows this summer.

The average return on all CDs with maturities of two years or less has been below 1% all year, and the average return on 36-month CDs fell below 1% in June.

The Fed influences how much savers earn on their 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.

Since December 2008, the Federal Open Markets Committee has held that rate at 0% to 0.25%.

For months, the Federal Reserve had been ambiguous on when it might reverse course and allow interest rates to rise again.

After each meeting, it would issue a statement that only said it would keep the federal funds rate near zero for an "extended period."

When asked just long that might be after the committee's June meeting, Fed Chairman Ben Bernanke said: “We believe we’re at least two or three meetings away from taking any action . . . and I emphasize at least.”

Since the rate-setting committee had four more meetings scheduled for 2011, we thought that meant we might see higher yields by early winter.

But on Tuesday, the committee crushed those hopes.

The Fed justifies its policy of pushing rates far below what a free and open market would provide as an attempt to boost the nation's struggling economy.

Providing commercial banks with cheap money might punish savers, but it allows those banks to offer low-cost loans to everyone from business owners to home buyers.

The idea is that that will encourage companies to expand and hire more workers and families to purchase bigger, nicer homes.

It hasn’t worked.

By almost every measure -- job creation, home prices, manufacturing output, consumer spending, commercial construction -- the economy is recovering from the 2008-09 recession more slowly than the Fed expected.

Concerns that we might be sliding back into another recession, a so-called "double-dip" recession, have intensified this summer.

In its post-meeting statement, the Fed's rate-setting committee characterized the state of the economy in more pessimistic terms than before.

It clearly decided to commit itself to holding rates extremely low for another two years in an effort to reassure investors and corporate decision makers that ultra-cheap credit would be available for much longer than anyone expected.

The Fed's decision came after a tumultuous two weeks that have had a terrible effect on another aspect of our savings -- our retirement funds and personal stock portfolios.

Stock markets around the globe were shaken when partisan bickering in Congress almost blocked the government's ability to borrow money and risked defaulting on its $14.3 trillion in debt.

That caused Standard & Poor's to downgrade the government's credit rating late Friday, setting off panic selling on stock markets around the globe.

By the time the closing bell rang on Monday, Wall Street had endured its worst loss since the banking industry was teetering on the verge of collapse in October 2008.

All in all, U.S. stocks had lost 15% of their value in just two weeks.

A rally on Tuesday gained a chunk of that back but still left investors feeling weary and battered.

And now we know that we'll be earning a pittance on our bank accounts for the foreseeable future, too.

Follow Interest.com on Twitter.