February Fed update: Fed caution is bad news for savings accounts
February 02, 2017
Is the Federal Reserve's waiting game to raise bank rates back on?
In December of 2015, the Fed raised short-term interest rates for the first time since the Great Recession. Based on Fed rate policy shifts historically, it was widely assumed that this would be just the first in a series of incremental rate increases that would occur over subsequent meetings. However, it was a full year until the Fed raised rates again.
Now, following its first meeting since that second rate increase, the Fed announced on Feb. 1 that it would not be raising rates again at this time. Clearly, the approach of making a series of incremental shifts is not the style of Janet Yellen's Fed.
Does that mean it will be another full year until the Fed raises rates again? That depends in part on inflation, and in part on just how cautious the Fed continues to be.
Multiple factors play into Fed's caution to raise bank rates
The Fed describes its dual goals as fostering strong employment and managing inflation.
With unemployment now below 5 percent and jobs still growing at a healthy rate, the job market does not seem to be a major concern. Inflation, though, has been chronically low in recent years, running well below the Fed's target of 2 percent. While consumers welcome low inflation, some economists worry that an absence of price increases discourages economic activity.
Consumer Price Index
Interestingly, the Consumer Price Index has risen by more than 2 percent over the past year, and at an even faster rate in recent months. However, the Fed won't tie itself to any one measure of inflation, describing itself as looking at a range of different measures and over a variety of different periods. By just about any measure though, U.S. inflation has been on the rise in recent months.
Perhaps an X factor in the Fed's abundance of caution is not wanting to raise rates so soon after a new administration has taken power in Washington. This would be less a matter of what the Fed thinks of Donald Trump, and more a case of not wanting to add to the uncertainty that exists until the direction of new fiscal policies becomes more clear.
Why delay on hiking rates matters to consumer savings accounts
The Fed standing pat on rates even while inflation is rising is noteworthy to consumers because it threatens the value of their bank deposits. While the Fed does not directly control the interest rates banks pay savings account interest rates, CD rates, and the like, Fed policy does have an influence on these rates. The Fed holding its rates low encourages banks to keep their deposit rates low, which is bad news for consumers because it means that rising inflation is devaluing their savings at a faster rate.
In the absence of Fed action, it is up to consumers to actively shop for higher rates. Inflation may be tough for today's bank rates to beat, but at least you can slow down the damage by finding the highest interest savings accounts available.
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