Could Bank Rates Get a Boost from the Fed?

The Federal Reserve is said to be considering how to unwind the various stimulative measures it has taken over the past year and a half. Those stimulative measures include lowering the short-term rates at which the Fed makes money available to banks, and actively buying bonds to lower longer-term interest rates. The Fed's actions have been influential in driving bank rates to record lows, so any unwinding of those efforts should spark some recovery in savings account rates, money market rates, and CD rates.

The exit strategy involves a delicate balance. The Fed cannot maintain these stimulative measures indefinitely, and yet, it is questionable whether the economy is ready to stand on its own two feet without their support. So, while raising interest rates seems on the surface to be a decision that is in the hands of the Fed, the truth is that larger economic forces more or less dictate the Fed's actions.

Is the economy now strong enough for the Fed to start backing away? The financial markets don't think so. Bond yields have been sliding down all month, and the stock market has fallen sharply over the past week or so -- both signs of concern about economic weakness.

In short, the Fed's exit strategy for its measures to drive down interest rates will have a great deal to do with when bank rates finally start to recover. However, economic strength will dictate when that exit strategy is rolled out, and right now, the economy is doing little that would encourage the Fed to start backing away.

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