Fed rate hike? The Fed again leaves interest rates where they are—nowhere
The Federal Reserve again decided against raising interest rates Wednesday, sending the clearest signal yet that rate increases are likely to be few and far between for the foreseeable future.
For personal savers that means adjusting to today’s rock-bottom interest rates as a longer-term reality than had been hoped when the year began. Many have been hoping for a fed rate hike soon.
The Fed, the nation’s bank for banks, is considered unlikely to take action right before the election, so an increase probably won’t happen until December -- if nothing else comes up to sidetrack the economy.
If so, it will have been exactly a year since the Fed’s rate-setting committee announced its first modest increase last December in the key federal funds rate, which determines other interest rates.
That ¼ point rate increase ended seven years – a historic length of time – in which the Fed kept rates near zero to boost the economy.
At the time, it was expected to be followed by as many as four more ¼ increases in 2016 as the economy gained strength.
But in a statement Wednesday, the Fed’s rate-setting committee indicated that, while optimistic about the direction of the economy, they remain concerned about its resiliency.
“The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives,” the statement read.
While unemployment is only 4.9% and the economy added an average of 232,000 jobs monthly over the last three months, wage growth and inflation remain below levels the Fed would like to see.
An updated survey of Fed members released Wednesday lowered their prediction for future rates, reflecting the committee’s cautious approach.
The members see the federal funds rate rising to only 0.6% by year end, reaching 1.9% by 2018 and topping out at 2.9% in the longer run, down from 3% in earlier predictions.
The most distressing development may be that many analysts now believe that even when the Fed finally does boost the Federal Funds rate, it’s likely to take some time for CD and savings account rates to follow.
Years of rock-bottom rates have created a “new normal” that is expected to be hard to shake.
Currently, CD interest rates remain below 1% for one- and five-year CDs. That's a far cry from rates in 2007, just before the crash, which averaged more than 3.5% for one-year CDs and about 4% for five-year CDs.
For individual savers, it still makes sense to keep emergency fund savings in bank accounts or CDs where it’s not subjects to the ups and down of the stock market, and it can be accessed easily.
And it’s still important to shop around for the best interest rates you can find.
But Wednesday’s decision by the Fed and the long-term forecast by board members make clear that personal savers shouldn’t expect any dramatic change in policy soon.
Rather than waiting on the Fed, with the hope that it might change things, the smarter path is to plan for rates to stay relatively low for the next couple years at least.
What do you think of the latest Fed rate hike decision?