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Fed tapering: a win for banks, but not consumers

December 18, 2013

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

money market accounts

It may be the most anticipated, speculated-about and feared move in monetary policy history. Yet when it finally came, it seemed almost like a non-event.

The Federal Reserve today finally announced the first step toward ending its quantitative-easing program. For much of 2013, the stock market has acted negatively whenever the specter of the Fed ending its stimulus loomed. However, shortly after today's announcement, stock prices soared. This is a reflection of how mild the Fed's tapering plans are, compared to what many expected.

If professional investors loved the Fed's announcement, so should bankers. Consumers, however, have less reason to stand and cheer one of Ben Bernanke's final acts.

The beginning of the end for QE

As a central part of its quantitative-easing program, the Federal Reserve has been buying $40 billion in mortgage-backed securities every month, and $45 billion in U.S. Treasury bonds. These purchases had the effect of pushing long-term interest rates down, which most notably has played a role in producing the lowest mortgage rates in history over the past few years.

The Fed will now back off from those purchases -- but only in baby steps. Beginning in January, the Fed will buy $35 billion in mortgage-backed securities every month, and $40 billion in Treasuries. In other words, each purchase program will be reduced by $5 billion for a total tapering of $10 billion a month, a much smaller reduction than many had anticipated.

A trade-off

As if this minimal reduction in quantitative easing were not enough, the Fed threw another bone to the stimulus hounds with respect to its plans for short-term interest rates. The Fed has long said that it would keep short-term rates near zero until the unemployment rate reached 6.5 percent. Now, with unemployment nearing that target, the Fed announced today that it anticipates keeping short-term rates near zero even after unemployment drops below 6.5 percent, as long as inflation remains in check.

In short, the Fed announced about as slight a tapering program as possible, and then offered a trade-off via the prospect of an extended period of low short-term rates.

A win for banks, a loss for consumers

The Dow Jones Industrial Average rose by more than 1 percent shortly after the announcement, which is Wall Street's version of a standing ovation. Bankers should also stand and cheer. Tapering the bond-buying programs should eventually mean that lenders can charge more for mortgages. However, keeping short-term rates low is likely to keep bank rates on CDs, savings accounts and money market accounts near zero.

That win for bankers, of course, is a loss for consumers. The spread between mortgage rates and savings account rates had already been widening in 2013, and with the Fed's new policy direction, the gap between borrowing costs and deposit yields may well grow wider in 2014.

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