Fed sticks with record-low interest rates through late 2014

Ben Bernanke picture

The Federal Reserve has resisted pressure to boost the economy by driving interest rates even lower – at least for now.

The bank’s rate-setting committee ended its final meeting of the summer today by reaffirming its intentions to hold short-term interest rates at record lows through at least late 2014.

It did not tack another six months onto that date and pledge to leave short-term interest rates unchanged until mid-2015, as some economists had expected.

Nor did the Federal Open Market Committee move to drive long-term interest rates lower.

It did not announce a new campaign to buy billions of dollars’ worth of additional Treasury bonds or government-backed mortgages for its already bulging $2 trillion portfolio.

That’s about all savers, who have seen the returns on their CDs, savings and money market accounts collapse due to the Fed’s policies, could expect.

But many economists and Wall Street analysts say Fed Chairman Ben Bernanke won’t be able to take a wait-and-see approach much longer.

The committee’s official statement acknowledged that “economic activity decelerated somewhat over the first half of this year. Growth in employment has been slow in recent months, and the unemployment rate remains elevated. ... Household spending has been rising at a somewhat slower pace than earlier in the year. Despite some further signs of improvement, the housing sector remains depressed.”

If the economy doesn’t show some signs of more robust growth over the next couple of months, creating a significant number of new jobs along the way, they expect the Fed will act at its next meeting in September.

The Fed’s policy makers originally established late 2014 as a target date for raising interest rates -- or at least consider raising interest rates -- in January.

It continues to be the soonest we can expect to see banks and credit unions offer higher interest rates on our deposits.

(Short-term bank deposits or bonds are generally considered to be those that mature in five years or less. Long-term investments take more than five years to mature, often much longer, typically 10 to 30 years.)

The Fed influences how much savers earn by establishing 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 it appears 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, the banks haven't needed to pay consumers for their deposits, cutting the return on those accounts to nearly nothing.

It's hard to overstate how hard the Fed's policy has been on savers, especially those who depend on the earnings from their CDs to keep food on the table and a roof over their heads.

Here's how the average return on the most popular certificates of deposit has changed since the federal funds rate was cut to 0% on Dec. 16, 2008. The average rate on:

Average CD Rates, 2008 vs. Today

  • Term

    December 2008 (APY)

    August 2012 (APY)

    Record Low

  • 3-Month CDs

    1.58%

    0.14%

    0.14%

  • 6-Month CDs

    1.93%

    0.20%

    0.20%

  • 1-Year CDs

    2.30%

    0.31%

    0.31%

  • 2-Year CDs

    2.39%

    0.51%

    0.50%

  • 3-Year CDs

    2.57%

    0.66%

    0.66%

  • 5-Year CDs

    3.13%

    1.08%

    1.08%

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

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 1.08%, 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 summer, 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.

So it still looks like another two years or so before the Fed might finally relent and allow interest rates to begin rising.

Not that we’re counting.

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