July 30, 2015
The July 29 statement from the Federal Open Market Committee made this week's Federal Reserve meeting the latest in a growing series of non-events from the central bank. While Fed meetings continue to attract ample media attention, beleaguered deposit customers would do well to look beyond the Fed for signs of life from savings account rates.
The Fed signals a preference for following rather than leading
The Fed's statement said that while employment and inflation have shown improvement, they would have to do even better before the Fed would feel comfortable raising rates. This is a little bit curious, since employment has recovered from the job losses resulting from the last recession and is now at an all-time high, while inflation in recent months has been running above the Fed's 2 percent target.
Janet Yellen's Fed has exhibited a persistent concern with not wanting to upset the financial markets. Increasingly though, this worry seems to go beyond wanting to break the news of policy changes gently to the point of reluctance to make any news at all.
The preference of today's Fed to follow rather than lead the financial markets is not unprecedented. The more assertive role the Fed took under former chairman Ben Bernanke was perhaps forced by the fact that the markets were thrown into chaos by the financial crisis. Now Janet Yellen's Fed has shown a hesitancy to upset the status quo, which means depositors will have to look elsewhere for signals of improvement in bank rates.
Where to look for signs of change
If the Fed is hesitant to be the agent of change for interest rates, how can you tell when rates are ready to start rising?
Here are two things to keep an eye on:
- The Treasury bond market. Bond traders are paid to anticipate economic events, and Treasuries are the purest reflection of general interest rate trends because their prices are not affected by issuer-specific events the way corporate bonds might be. Be advised that bond markets fluctuate up and down daily, so don't try to extrapolate a trend from every short-term zig and zag. Focus on significant, month-over-month changes, and you will get an early sign of when rates are making sustained moves.
- The market for bank rates. Monitoring competing certificate of deposit, money market account and savings rates will tell you quickly when individual banks start deciding to move rates higher. After all, the leaders are going to move well in advance of the vast population of banks. In any case, you don't need the overall average to move before you can improve your rates - you only need to spot a leader making a better offer.
Anticipating changes in interest rates is important for financial decisions such as when to refinance a mortgage or move money from a savings account to a long-term CD account. Since the Fed seems hesitant to lead the markets, keeping your eye on the markets themselves is your best chance of anticipating interest rate trends.
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June 17, 2015
The big day is not here yet, but it is coming. The Federal Reserve concluded its meeting today without raising short-term interest rates, but it continues to remind everyone that such an action is more or less inevitable. The Fed's position on this might be best understood by revisiting an old English legend.
Janet Yellen at the water's edge
Janet Yellen's tenure as chair of the Fed has shown persistent effort to reduce the shock of policy change by providing signals to financial markets and business communities well in advance. Minutes from recent Fed meetings have made it clear that economic conditions will change monetary policy in certain aspects. In this way, Yellen's relationship to interest rates is like King Canute's relationship to the ocean's tide.
Somewhere around the beginning of the 11th century, King Canute ruled over England and parts of Scandanavia. Concerned that his subjects were developing too much faith in his ability to control events, he had his throne carried to the sea shore where he ordered the tide to stop coming in. The tide, of course, did not stop. The King told his subjects to view that as a demonstration of the limits of his or any other ruler's royal powers.
By sending signals over the course of several months that an interest rate hike may be on its way, Yellen can be seen as playing the role of King Canute. She knows that the business community and stock market do not like the idea of higher interest rates. She also knows they are inevitable at some point. Rates have been unnaturally low in recent years: the Fed has kept discount rates between 0 and 0.25 percent since the end of 2008, but over the past 50 years they have averaged 5.56 percent. With employment growth and inflation picking up, keeping rates near zero is unsustainable.
The bond market has certainly noted that conditions call for higher interest rates and has not waited for the Fed to make its move -- Treasury bond yields have risen in recent weeks.
Look for bank rates on the move
It is not just bond rates that have been getting a jump on the Fed's move toward higher interest rates. Although savings account rates on average remain near zero, a few banks have broken ranks and have started to raise their rates.
This represents an opportunity for bank customers to start earning more on their savings, but only if they take action. Banks raising savings account rates are still in the minority. When it finally comes, the Fed's decision to raise rates will not trigger an across-the-board increase in bank rates, but it will be a reflection of the fact that interest rate conditions are in the process of changing. Those changes mean the gap between the highest and lowest bank rates will likely widen, so the reward for rate shopping will become greater as the market adjusts to developing conditions.
April 30, 2015
Despite rumors that this week's Fed meeting would be the meeting -- the one at which it finally decides to raise interest rates -- it now appears that the Fed meeting everyone has been waiting for could happen anytime on this year's Federal Open Market Committee schedule.
In other words, while the Fed remained true to their word and did not raise rates at the end of this week's meeting, they have made it clear that they expect to do so fairly soon -- perhaps as soon as their June 16-17 meeting.
Why the Fed is waiting -- for now
It has long seemed that the Fed would like to raise interest rates, but keeps encountering a series of obstacles. For years following the Great Recession, unemployment remained high and job growth was too sporadic to risk raising rates. Then, when job growth stabilized and unemployment declined last year, a sudden bout of deflation scared the Fed off from raising rates.
In recent months, just as prices appear to be recovering, job growth has once again faltered. Also, the initial estimate of first-quarter real GDP growth came in at an annual rate of 0.2 percent, suggesting that the economy more or less ground to a halt in the first quarter.
The expectations game
Despite these setbacks, the Fed's latest statement seems pretty optimistic. It notes that weakness in prices was largely a temporary result of falling energy prices, and that rising real incomes and strong consumer sentiment set the stage for stronger growth in the months ahead.
This optimism is especially significant because the Fed has made it clear in recent statements that inflation and employment may not have to actually reach its goals before it raises rates, but merely show progress toward those goals.
Notably, while the Fed's previous meeting notes specifically mentioned that it did not anticipate a rate hike at the April meeting, today's notes contain no such assurance about the June meeting.
The reason for all this hinting and emphasis on anticipation is to cushion the impact of a rate hike by giving the investment community plenty of time to get used to the idea. The stock and bond markets are both at elevated levels that depend at least in part on low interest rates. Investors may have to learn to live with higher rates, but the last thing the Fed wants to do is trigger a damaging market shock.
In contrast, one group that is eager for higher rates are depositors in U.S. banks. The most recent MoneyRates survey of bank rates found that most banks seem content to sit back and wait for a change in Fed policy before raising savings and money market account rates.
However, a handful of banks with the highest savings account rates seem intent on getting out ahead of the Fed, and have already started to raise their rates. Their version of playing the expectations game is to anticipate that Fed policy will change, and by mid-June they may be proven correct.
March 18, 2015
This was not your standard stay-the-course announcement from the Fed. While no policy changes were made as a result of the Federal Open Market Committee meeting that ended today -- indeed, the Fed all but promised there would be no changes at the next meeting either -- the Fed may have sharpened the focus on when it will finally raise interest rates.
Key wording changes put a target on June's meeting
Particularly when the Fed has had no policy changes to announce, statements following its meetings tend to have a certain sameness to them -- indeed, some of the language has been identical from one meeting to the next. However, this time there were some surprises.
Not only did the Fed announce that it was not raising interest rates at this meeting, but it took the unusual step of stating that a rate increase at the next meeting (which is in April) is unlikely as well. Normally, the Fed uses fuzzier language than that, shying away from committing to what it will or won't do at any particular future meeting. This is not because the Fed likes being coy. Rather, by shying away from specific commitments the Fed retains the greatest latitude to adapt policy to changing conditions.
In a sense, downplaying the possibility of a rate hike in April can be seen as an attempt to alleviate the usual market jitters that lead up to a Fed meeting. However, if the Fed took some pressure off of April's meeting, it put something of an investor target on the following meeting in June.
This is not simply because the Fed's commitment to current rate levels did not extend beyond the April meeting. Another significant wording change in today's statement involved the Fed's monitoring of inflation. One reason the Fed has given for keeping interest rates low is that inflation is running below its target rate of 2 percent. However, while reiterating this in today's statement, the Fed also explained that it might raise rates when it "is reasonably confident that inflation will move back to its 2 percent objective over the medium term."
This suggests that the Fed might not wait for inflation to reach 2 percent, but might raise rates if it believes inflation is headed back in that direction. In particular, this puts added focus on oil prices, which have been a leading cause of the recent bout of deflation. It also puts further attention on the Fed's June meeting.
The waiting game
Don't expect to see an immediate impact on bank rates from today's Fed meeting, but since they are clearly entertaining the possibility of a rate hike as early as midyear, this could push savings account rates higher in the second half of this year.
The bad news for consumers is that mortgage rates might move higher even sooner. In fact, if the Fed is right about inflation firming up, mortgage lenders will probably not wait for the Fed to start raising their rates.
January 28, 2015
Once you brush aside the dusty economic jargon, today's concluding statement from the latest Federal Open Market Committee meeting was positively sunny. Just don't expect the stock market to see it that way.
Meanwhile, today's statement leaves the outlook for bonds and bank rates mixed.
What the Fed didn't say may be the big news
The sunny side of the Fed's statement is that it sees economic growth as solid, and notes continued improvement in employment. The Fed even was willing to dismiss recent signs of deflation. Though the Fed has repeatedly expressed concern about inflation running below its 2 percent target, today's statement notes that price increases should firm up as energy prices stabilize and as the labor market moves closer to full employment.
That optimism might be the reason for what the Fed didn't say in today's statement, and sometimes it is what the Fed doesn't say that markets and commentators seize upon. In recent meetings, Fed meeting statements had mentioned an expectation of keeping short-term rates near zero "for a considerable time" following the end of its latest quantitative easing program. Today's statement did not include that language.
What does that mean? At face value, and couched in all the usual qualifiers of these Fed statements, it simply means the Fed is leaving itself free to adjust as conditions change. However, in removing a commitment to keeping rates low for a considerable time, it could be argued that the Fed is anticipating an imminent change in conditions.
Implications for stocks, bonds and savings account rates
Low interest rates have created demand for stocks, and while nothing in the Fed's statement changed the low rate policy, stocks are long-term investments. The removal of the commitment to keep rates low "for a considerable time" might start some investors looking for an exit before rates start to rise. Plus, the stock market has become positively greedy for Fed stimulus, and the Fed's sanguine outlook for the economy -- despite recent deflation and global woes -- would seem to quash the hope of new stimulus anytime soon.
Bond investors might take hope in the Fed's plan to continue to roll over the mortgage-backed and Treasury securities acquired during its massive quantitative easing program. This means that while the Fed is no longer adding to its inventory of those securities, it is also not in a hurry to sell off those securities. That should give the bond market some measure of stability in the near term, though long-term bond holders should be concerned about volatility once the Fed shifts to a less generous policy or inflation starts heading toward more normal levels.
Meanwhile, the Fed's continued policy of low short rates will bring no immediate relief to depositors facing today's near-zero savings account rates and other bank rates. The bright spot for these depositors is that the Fed's change of language on low rates hints that higher deposit yields could soon appear on the horizon.