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Fed's Low Profile Won't Stop Interest Rates From Rising

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federal-reserve-facadAfter finding itself the subject of controversy due to a series of interest hikes last year, including one in its December meeting, the Federal Open Market Committee (FOMC) of the Federal Reserve kept a lower profile in the meeting that concluded on January 30. It not only didn't raise interest rates, but its official statement avoided a subject that could have been troublesome -- the recent government shutdown.

Despite the Fed taking no action on interest rates, there is a strong possibility that individual banks may continue to raise rates on consumer products. That means that consumers should do some comparison shopping, whether looking to earn interest on a savings account or to minimize the interest they have to pay on a credit card.

Fed meeting: no action and few words

The FOMC decided to maintain the Fed's interest-rate target in a range between 2.25 percent and 2.50 percent. This lack of change is no surprise given the Fed's interest-rate hike at the last meeting. The FOMC's rate projections suggest a gentler pace of rate increases in 2019 than the full 1 percent increase that took place in 2018.

In addition to leaving its rate target unchanged, the FOMC's press release following the meeting maintained an upbeat tone about the state of the economy. Notably absent was any comment on the potential economic impact of the prolonged government shutdown.

That may seem an odd development to ignore, given that the Congressional Budget Office estimates that the shutdown from late December to late January may have cost the economy $11 billion ($3 billion of which may not be recouped), and the fact that the shutdown could resume on February 15 if a deal is not reached. However, with negotiations to avoid a resumption of the shutdown still pending, the FOMC may have deemed that staying silent on the topic would be the least disruptive course to take.

Consumers should look for rising bank rates

Media coverage of Fed meetings often gives the impression that the FOMC is a master marionette controlling all interest rates across the economy. While it is true that the Fed influences some consumer rates, and perhaps more importantly the Fed's decisions are based on many of the same inputs used by financial institutions in setting rates, not all rates rise in lockstep with the federal funds rate.

Banks can raise rates without action from the Fed. This is especially important for consumers to remember given the recent trend toward banks raising rates on deposit products like savings accounts. Even without action at the latest Fed meeting, savings account rates, as well as money market and CD rates, may still change in the weeks ahead.

This means if you are thinking of opening a CD, savings or money market account don't make any assumptions based on where rates stood the last time you checked. The rate environment may have shifted significantly since then.

For example, the latest MoneyRates.com America's Best Rates survey found that savings account rates just had their biggest year-over-year increase in the history of the survey. What matters even more for consumers looking for a good deal is that a wide gap has opened up between a handful of banks offering the best savings account rates and the bulk of banks offering average or sub-par rates. This gap has been widening steadily for over two years now.

Similar gaps between the leading CD rates and leading money market rates and their respective averages also exist.

What does this all mean? Despite the Fed's decision to take no action on rates at their January meeting, this remains a rewarding time to shop actively for rates. It is also a particularly costly time to passively accept average bank rates.


Previous Federal Reserve Board Update Articles:

FOMC Date2018 FOMC Meeting Update Articles
12/21/2018Expect more stable Fed rates in 2019 after latest hike
11/11/2018Look for bank rates to move even as Fed stands pat
9/26/2018September 2018: Rate hike may hurt more than help consumers
8/1/2018Banks aren't waiting for Fed rate increases
6/13/2018Your strategy when the federal funds rate rises
5/2/2018Interest rates surge despite Fed's inaction
3/21/2018Fed rate increases not helping consumers
1/31/20183 ways to profit when market rates outpace the Fed
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