Where to look beyond the Fed for signs of life from stagnant bank rates
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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