November Fed update: Fed doesn't act on bank rates - but consumers can
November 02, 2016
Of the several times the Federal Reserve has delayed acting on raising rates in recent years, perhaps none was as predictable as the outcome of the meeting that concluded on November 2. Unlike FBI Director James Comey, the Fed's nature is to avoid doing anything that might create a stir with an election less than a week away.
Still, its reticence to change rate policy so close to the election obscures the fact that since the last Fed meeting concluded on September 21, economic evidence in favor of increasing rates has become stronger.
Inflation may surpass Fed's target
Much of the Fed's rationale for not raising rates has centered around the fact that inflation has persistently lagged behind its 2 percent target. However, that rationale is increasingly wearing thin.
Twelve months ago, year-over-year inflation was essentially flat. Now it is at 1.5 percent. That's still below the 2 percent target. But over the past six months, the pace of inflation has exceeded a 2 percent annual rate. Inflation rose by 1.3 percent during that six months, which would project to an annual rate of 2.6 percent.
A key factor suppressing inflation was the precipitous decline in oil prices from mid-2014 through the end of last year. Not only is that sharp decline unlikely to be repeated from current price levels, but oil prices now are roughly where they were a year ago. With oil stabilizing, expect a return to more normal inflation conditions. If oil has one of its periodic price spikes, it could easily send inflation soaring past the Fed's 2 percent target.
Time to start watching retail banks rather than the central bank
You know the type of chore you never seem to find the right time for? Raising interest rates seems to be that kind of chore for Janet Yellen's Fed. The Fed hasn't cited timing specifically in explaining its rationale for the delay in restoring rates to more normal levels. However, the election is just the latest in a series of events that seems to have played a role in deterring rate increases. With the next Fed meeting scheduled to take place between the election and the inauguration of the next United States president, it seems entirely possible that the next rate increase won't occur until sometime in 2017.
However, even before the Fed acts, accelerating inflation could affect how some banks set their interest rates for customers. With conditions changing, some financial institutions are likely to start raising bank rates before others. Consumers would do well to keep an eye on the banking market, and be ready to move to banks offering higher rates.
Pursuing higher savings account rates or CD rates is not just about earning a little extra money. With inflation on the rise, consumers need to act in order to keep up. Regardless of what the Fed does, for you standing pat under these circumstances could well mean seeing inflation erode the value of your savings.
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