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Fed's concerns remain with low inflation -- not low rates

October 29, 2014

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

savings account rates

Quantitative easing is officially over -- or is it?

Not surprisingly, the Federal Reserve today finally announced the end of its program to bring long-term interest rates down via purchases of Treasury bonds and mortgage-backed securities. However, until the Fed sells those securities or at least starts letting them mature without repurchasing new ones, the impact of that program will not be entirely reversed.

Beyond a discussion of the quantitative easing program, there were two striking things about the latest statement from the Federal Open Market Committee (FOMC): One is the almost exclusively domestic focus of its discussion of economic affairs, and the other is that it seemed to condemn savings account rates and other bank rates to trailing inflation for the foreseeable future.

All quiet on the home front

The Fed cited a number of domestic economic factors that seem to be going well. These included:

  • Solid job gains leading to a lower unemployment rate.
  • Improvement in the utilization of labor resources (i.e., less under-employment).
  • A moderate rise in household spending.
  • Growth in business fixed investment.

It is an encouraging list of developments. Not mentioned anywhere, however, are rising concerns about recessions in Europe and slowing growth in large developing economies. That slower growth seems almost certain to hurt U.S. exports, especially with the rise in the dollar over recent months. Of course, supporting the world economy is beyond the Fed's mission, but it is surprising to see no caution about the effect of the broader environment on the growth factors cited by the Fed.

The Fed may simply be keeping its focus narrowly on domestic affairs, and does not want to speculate on international ones until or unless they start to measurably impact the U.S. economy. Or, it may be implicitly expressing confidence that the U.S. economy has gained enough strength to weather an international slowdown.

No love for savings account rates

While the quantitative easing program was largely focused on bringing mortgage rates down, consumers with savings accounts and other bank deposits should be more attentive to the part of the FOMC statement that addressed the federal funds rate, because this has more of a direct influence on short-term bank rates.

The Fed said that it expects to maintain the federal funds target between 0 and 0.25 percent "for a considerable time." While that is an appropriately vague statement (conditions are too unpredictable for the Fed to lock into a specific timetable), it is noteworthy that the Fed specified it expects to maintain that low range as long as inflation continues to run below its target of 2 percent.

Translation: If the Fed has its way, inflation will reach 2 percent before short-term interest rates do. That means investors in deposit accounts can expect their interest rates to continue to trail inflation. Until the Fed gains confidence that low inflation is not a problem, the best hope depositors have for better bank rates is to shop around for them.

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