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Fed moves predictably through enigmatic economy

October 30, 2013

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

savings accounts

The Federal Open Market Committee (FOMC) offered no change in its policy direction -- and very little change in what it had to say about the economy -- in the statement issued at the conclusion of its meeting today.

Parsing the tea leaves

The statements the Fed issues after FOMC meetings tend to be somewhat poker-faced. Part of the art of parsing these statements is in comparing them with prior statements. Much of the language from the October 30 statement is identical to what the Fed released after its September 18 meeting. Curiously, the Fed continues to comment that "indicators of labor conditions have shown some further improvement," even though this seems at odds with Bureau of Labor Statistics employment releases from recent months.

Another recurring theme of recent Fed statements is that "fiscal policy is restraining economic growth," a comment that is reprised in the latest statement without any specific commentary on what lingering damage the government shutdown might have done.

Market reaction

The stock market fell in the aftermath of the statement's release, though it recovered somewhat by the closing bell. One shouldn't read too much into that reaction. The stock market has rallied in recent days in anticipation that the Federal Reserve would continue its recent monetary policies. That's exactly what the Fed announced, but sometimes when the market has rallied too much in advance of good news, there is a bit of a letdown when the actual news is released.

Part of the problem is that the government shutdown, even though it is over, has left the Fed operating somewhat in the dark. Not only have some important economic data releases been delayed, but there is no telling how much the uncertainty created by the government has suppressed consumer and business spending.

Between that and wanting to ensure a smooth transition from Ben Bernanke to Janet Yellen, the Fed seems unlikely to make any significant change in policy for the next several months. All the minute examination of wording changes from one Fed statement to the next only underscores the absence of any substantive policy changes.

Outlook for bank rates

While the stock market may go through some immediate gyrations immediately after a Fed statement appears, the impact on bank rates is always more measured. As noted above, the economy is a bit of a mystery in the wake of the government shutdown. Until that mystery starts to clear up, expect rates to remain roughly where they are now.

If a significant growth trend ultimately emerges, expect to see mortgage rates start to rise well before rates on savings accounts and other deposits. This is a reflection of both the longer-term interest rate commitment that mortgages represent, and the self-interest of banks in setting interest rates on their products.

Growth strong enough to budge savings account rates seems to be on hold at least until next year. Until then, perhaps the best that can be said for those rates is that they don't have much further to fall.

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