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Fed cheers quickening growth and inflation

July 30, 2014

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

Savings account rates

Though the Federal Reserve's job is to watch out for the American economy, it sometimes sees things very differently from the typical American consumer. That reality was underscored with the Fed's announcement today at the end of its July Federal Open Market Committee (FOMC) meeting.

In its statement, the Fed expressed encouragement at the recent progress of the economy, citing improving employment and rising inflation as among the good signs. The average consumer, on the other hand, might be forgiven for feeling that the job market remains weak and that inflation is not something to be welcomed.

Welcoming inflation?

With respect to the job market, the Fed could point to a recent surge in employment growth as a reason for optimism. Net job growth nationally exceeded 200,000 for five of the first six months of this year.

Still, a disproportionate number of these jobs are temporary, part-time or low-paying positions. Meanwhile, the unemployment rate has been dropping more slowly than one might expect in such a strong growth environment, simply because many people who had dropped out of the job market are gradually getting back into it.

The FOMC statement seemed to acknowledge that this is a glass both half-full and half-empty: While recent job growth has improved, much of the labor market remains underutilized. Until labor comes closer to being used to its capacity, expect wage growth to remain anemic.

The Fed seems less ambivalent about inflation. Inflation surged in the second quarter of 2014, and the FOMC statement welcomes that development with open arms. In previous statements, the Fed had fretted about inflation falling below its long-term target rate of 2 percent, which would be considered a sign of economic weakness. In light of recent price increases, the Fed is less worried that inflation will fall short of its target rate.

Overall, the FOMC statement seems to depict the economy as on the right track, but still in need of coaxing. Therefore, the Fed plans to continue its stimulative policies of near-zero short-term interest rates and systematic bond purchases, though it will take the next step in its gradual tapering off of the latter.

Savings account rates could fall further behind inflation

Overall, the FOMC meeting marked no dramatic change in Fed policy or economic developments. Job growth, the unemployment rate and inflation remain the key things to watch, beginning with the release of July's employment figures this Friday.

While the economic improvement that the Fed acknowledged may eventually be the key to improving bank rates, things could get worse before they get better. Because banks are awash in deposits, it will take awhile before loan demand improves to the point where bankers feel they have to offer higher savings rates to attract customers.

Meanwhile though, inflation seems to have no check on its resurgence. It has been supported by Fed policy, and with troubles in the Middle East and Russia widening, there may be no stopping inflation now.

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