Fed Decision Signals No Immediate Help for Savings Accounts

The Federal Reserve today decided to leave its bank lending interest rate at a record low level, continuing its attempt to stimulate the economy. For depositors who've been living with low CD rates and savings account interest rates, this is not necessarily welcome news.

The Fed action could be likened to advising a patient to stay a few extra days in the hospital, even though the worse appears to be over. Indeed, in announcing its decision, the Fed even described the economy in terms that could be used for a recovering patient, saying that it would probably "remain weak for a time."

The Fed bank lending rate does not directly determine savings account interest rates, but it does have some influence on those rates by providing capital cheaply enough that banks do not have to offer extraordinary interest rates to attract capital from depositors. So, this signals no immediate help for savers hoping for higher rates.

Of course, if the economy and the banking system really are improving, that would certainly benefit savers. In the meantime though, savers have to hope that the Fed is right about inflation. The Fed stated an expectation that inflation would remain "subdued," and leaving interest rates at record lows certainly reflects that expectation. If the Fed is right, and low inflation or even deflation continue, then today's low interest rates look a little more attractive on an inflation-adjusted basis. If the Fed is wrong, and inflation starts to bubble up again, it will make those low interest rates even less palatable.

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