'No change' signal from the Fed could bring change to savings accounts
April 27, 2011
When does no change in plan represent a change?
One example could be seen in the conclusion of this week's Federal Reserve board meetings. The Fed announced no change to its plan to conclude its quantitative easing program in June. This announcement could finally bring a welcome change for CDs, savings accounts, and money market accounts.
What's at stake for CD, savings, and money market rates?
The latest quantitative easing program is one of a few different forces which have helped drive down CD, savings, and money market rates. This quantitative easing program involved the purchase of $600 billion in U.S. Treasury bonds, which was designed to drive market interest rates lower.
This program added to the forces suppressing interest rates, including low Federal Reserve discount rates, weak lending demand, and low inflation. The last of the Fed's bond purchases are scheduled for June, after which one of these low-interest rate forces will be gone. The change will be even more pronounced once the Fed starts to sell off the massive Treasury bond positions it has accumulated.
Key factors to watch
An end to quantitative easing could be good news for depositors in CDs, savings accounts, and money market accounts, who have been suffering through dismally low interest rates for two years now. However, because quantitative easing has been only one of the forces keeping interest rates down, the effect of this program's end is by no means certain.
So, as the quantitative easing program ends, depositors should keep their eyes on two dynamic economic forces which could determine what happens to interest rates in the months ahead:
- Economic growth. The economy has been technically out of recession for some time now, but has not yet sustained enough momentum to revive the lending business. Until this happens, bank rates are likely to remain low.
- Inflation. Inflation is on the rise. Now depositors have to hope that interest rates will respond, or else they will face further erosion of purchasing power.
In short, the end of quantitative easing will mark one change, but more change is needed for rates to rise.
