The Fed says interest rates won't rise until late 2014 -- if then

Ben Bernanke picture

Ben, you're killing us out here.

The Federal Reserve says it won't allow record low interest rates to rise until late 2014 – if then.

That's at least a year-and-a-half later than savers struggling to earn a reasonable return on their bank deposits – everything from certificates of deposits to money market and savings accounts -- previously thought.

"We recognize that during periods like this that savers aren't getting a good return," Fed Chairman Ben Bernanke said during a press conference following the announcement.

Well, duh. But that's as close to any sort of empathy we got from Bernanke.

The road to Wednesday's decision by the Fed's rate-setting committee began last August when it announced that short-term rates would remain at record lows "at least through mid-2013."

That was pretty devastating news for anyone who depends on the interest from their savings to keep a roof over their head, food on the table, or keep their nest egg growing.

But at least we had what appeared to be a firm date for higher rates and could plan our investment strategy accordingly.

During the fall, however, Bernanke became concerned that economists and investors were talking like a rate hike in June or July 2013 was a done deal.

With the economy still struggling to recover from the Great Recession, Bernanke decided that we were not fully appreciating the "at least" part of August's statement.

In December he said the Federal Open Market Committee would begin issuing regular updates on where it expects rates to be a year, or two years, or three years from now.

That first update was released today and it crushes any hope that we'll be earn more from our certificates of deposit, or our savings and money market accounts, for another two to three years.

The Fed influences how much savers make 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.

It's been essentially zero since December 2008 and a nifty new chart shows 11 or the 17 Federal Open Market Committee members believe the fed funds rate should remain there through the end of 2013.

That 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, 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.

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

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 1.16%, 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 winter, 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.

The Fed justifies its policy of pushing rates far below what a free and open market would provide as an attempt to pull the nation out of the 2008-09 recession.

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.

There's mounting evidence that the economic recovery is finally gaining steam, with the unemployment rate down and housing starts up.

The risk of sliding back into another recession, a so-called "double-dip" recession, is dramatically lower than it was last summer.

But by almost every measure -- job creation, home prices, manufacturing output, consumer spending, commercial construction -- the economy continues to recover more slowly than the Fed expected.

The committee's post-meeting statement said it "expects economic growth over coming quarters to be modest and consequently anticipates that the unemployment rate will decline only gradually."

So it's committed to holding interest 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.

As Bernanke told savers back in November, we'll just have to suck it up "for the greater good" for a couple more years.

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