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The Fed announces another lose-lose for consumers

April 30, 2014

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

long-term rates

"Transparency" became a buzzword at the Federal Reserve under former chairman Ben Bernanke. His successor, Janet Yellen, seems to be carrying on the tradition.

The Fed announced today that it would cut its stimulative bond-buying program by an additional $10 billion dollars a month -- the fourth consecutive Fed meeting that has concluded with a $10 billion cut to this program. Since predictability takes away any mystery about what the Fed is going to do, today's action was certainly in the spirit of transparency. Unfortunately, the economy is proving to be less predictable than the Fed's actions.

In the shadow of a slowdown

The Fed's latest meeting concluded just hours after an advance estimate of economic growth showed that the annual rate of real GDP growth had slowed to just 0.1 percent in the first quarter. This negligible rate of growth followed a 2.6 percent growth rate during the prior quarter, and 4.1 percent the quarter before that. In short, the economy seems to be hitting the brakes somewhat abruptly.

Despite the economy's anemic performance, it seemed unlikely that the Fed was going to react to a GDP report issued just hours earlier. Given the massive amount of data the Fed reviews, a sudden reaction to any one report would be seen as somewhat erratic. So, the Fed stayed the course, continuing to taper off from its bond-buying program. To some extent though, cutting back on monetary stimulus while the economy is slowing drastically makes the Fed seem out of step, as does the Fed's statement today that "growth in economic activity has picked up lately."

It may be that the Fed is reacting to more recent data than first quarter growth. The other reality is that the Fed cannot continue the bond buying program forever. The trick is to unwind that program before the next recession creates a need for fresh stimulus, and to unwind that program in as predictable a way as possible to minimize market disruption. Hence, the steady drip of $10 billion reductions to the program, despite the fact that the economy appears to be suffering a relapse.

Both savers and borrowers lose again

While cutting back on bond purchases, the Fed reiterated its commitment to keeping short-term interest rates low. This differing approach to short-term and long-term rates may be a lose-lose proposition for consumers. Cutting bond purchases allows mortgage rates to rise, while keeping short-term rates low encourages banks to keep savings account rates low.

When the economy was in dire straights, the Fed was fully committed to low interest rates, and that benefited borrowers. If the economy were to really hit its stride, rates across the board could rise and savings account rates would finally improve. However, with the economy stuck somewhere in-between, consumers have seen mortgage rates rise over the past year while savings account rates have continued to languish near zero. A lose-lose for consumers is becoming one of the predictable elements of Fed policy.

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