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Consumers should act faster than the Fed on interest rates

On July 26, the Fed concluded its latest Open Market Committee meeting by announcing no immediate change in its interest rate policy. It hinted, as it has done previously, that rate hikes are likely to be in store later this year, but recent history suggests that the Fed may act with an abundance of caution.

In other words, expect a very slow path toward more normal interest rates. Fortunately, there is no reason why deposit customers shouldn't profit by moving more quickly than the Fed.

The Fed takes a pause on interest rates

The Fed announced that it would maintain its target for short-term interest rates at a level between 1 and 1 1/4 percent. This comes against a backdrop of rates that have been gradually rising, after having been driven to abnormally low levels during the Great Recession.

Recently, employment growth has been decent but not spectacular, while inflation has flattened out at near zero. Those conditions make the Fed's decision not to raise rates understandable. On a more superficial note, since December the Fed has raised rates every other meeting. Having raised rates in June, it seemed due for a pause in its July meeting.

Although the Fed is probably going to be more responsive to immediate conditions than to follow this pattern of rate raises every other meeting, this on-again-off-again course toward higher rates is indicative of the Fed's cautious approach to changes.

A slow turn toward normal money rates

While immediate conditions might not provide a particularly strong reason to raise rates, the Fed lately has expressed an interest in returning monetary policy toward more normal levels. This ultimately could mean both continuing to raise short-term rates and liquidating some of the income investments the Fed has held to keep long-term rates low.

However, while the Fed has identified policy normalization as a goal, expect progress toward that goal to be gradual. Inflation, and to a lesser extent job growth, have not shown the type of consistency that would generate confidence, plus the Fed has taken pains to signal its intentions well before acting so as not to shock the financial markets.

Consumers can profit by being more active

If the Fed is being a bit timid in its move toward higher rates, banks are being even more cautious about raising the rates they offer consumers on savings accounts. Despite the series of rate increases by the Fed in recent months, the average savings account rate reported by the FDIC has yet to budge.

Fortunately, while rates overall are stuck near zero, the most recent MoneyRates.com America's Best Rates Survey found several banks that have broken away from the pack. This includes nine banks offering rates of 1 percent or better on savings accounts, which is several times the national average.

The message for consumers is clear: why wait for the Fed's slow progress toward higher rates, when you can profit from higher rates right away by switching banks?

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