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FOMC Meeting Preview: What to Expect after the Election

Next week's FOMC meeting might seem like a little bit of an afterthought following the election, but whoever wins the election will still need to know how to deal with a deep recession.
| MoneyRates.com Senior Financial Analyst, CFA
min read

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In the wake of Election Day, next week's FOMC meeting announcement could seem anticlimactic.

However, the Fed's outlook and policy is likely to send a strong message about what consumers need to be doing (not to mention a few hints the next occupant of the White House might use too).

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Fed Interest Rate Outlook: When will Near-Zero Interest Rates End?

The Federal Reserve uses interest rates to try to smooth out extremes in the economy. Lowering interest rates makes it cheaper to borrow and thus gives the economy a boost. Raising interest rates can be used to cool down the economy if inflation is getting too high.

The U.S. economy was slowing down even before the coronavirus pandemic hit, and it now has been plunged into a deep recession. This calls for a low-interest-rate policy, and the Fed responded earlier by lowering interest rates nearly to zero.

Unfortunately, the impact of the Fed's rate cuts has been muted by the fact that interest rates were already extraordinarily low going into 2020.

Over the past 50 years, the federal funds rate averaged just over 5%. At the end of 2019, that rate was just 1.55%. So, while the Fed has done just about all it can do with the fed funds rate by lowering it to near zero, it didn't have much room for interest rate cuts since rates were already unusually low.

While the fed funds rate can't get much lower, the Fed can at least try to hold that rate near zero for an extended time.

Economic projections released by the FOMC after its September 16 meeting show it expects the fed funds rate to stay at 0.1% through 2023.

In other words, interest rates are at very unusually low levels by historical standards, and the Fed expects to keep them there for the next few years.

What Overshooting on Inflation Might Look Like

In keeping rates unusually low for so long, the Fed is essentially giving up on using interest rate policy to keep inflation in check - at least for the time being.

The Fed explained its position on this by saying it might allow inflation to overshoot the Fed's 2% goal since inflation had lagged below that goal for a long time.

The Fed uses the Personal Consumption Expenditures (PCE) Index to measure inflation. Over the past ten years, the rise in the PCE Index has averaged about 1.5% per year, clearly below the Fed's 2% target.

If the Fed is willing to allow inflation to exceed 2% for a while because price increases have run below that rate for a long time, what would that look like?

MoneyRates.com calculates that inflation would have to run at an annual rate of 3% a year over the next five years to bring the average 15-year inflation rate up to 2%.

That's not a prediction of 3% inflation, but it is an illustration of how much room the Fed seems willing to give inflation, based on recent statements.

Expect More Pressure for Fiscal Stimulus - But Who Will Provide It?

By driving rates down to near zero and providing liquidity for lending, the Fed has used just about every monetary policy tool available to fight the current recession.

That puts the onus on the government to provide more fiscal stimulus to pick up the slack. This means more spending, and the responsibility for making that happen falls on Congress and the White House.

Given the depth of the current recession, the ultimate solution may involve a long-term federal spending program rather than the series of stop-gap, emergency handouts the government has used to respond to the coronavirus.

Naturally, a long-term program is unlikely to be initiated until the election outcome is known - and even then it may be delayed while new officeholders wait to take their places.

In other words, don't expect a quick fix to the economy. Today's interest rates are exceptionally low, but that might be the new normal for the foreseeable future.

Consumers: It's Up to You to Raise Interest Rates

A combination of extreme economic conditions and the limited policy options the Fed left itself mean that it may be a long time before interest rates rise again.

If you've been seeing your deposit accounts earn less and less as a result, does that mean you have no choice but to sit back and accept earning less interest?

For most consumers, the answer is no. Unlike the Fed, you do have some options for raising interest rates.

Here are four ways you may be able to earn more interest, even in an extended low-interest-rate environment.

  1. Shop around for better rates

    While bank rates generally have fallen, there are wide differences in rates. That means there is a lot to be gained by shopping for rates on savings accounts, money market accounts, and CDs.

  2. Bigger isn't better when it comes to rates

    The reason most consumers still have a chance to find better rates is that the largest banks, which have the most customers, generally offer rates that are well below average. If you are with a large, national bank, this might be a good time to switch rather than accept next to nothing in interest.

  3. Watch out for bank fees

    With interest rates low, it's especially important to be wary of bank fees. Otherwise, your relationship with your bank could be costing you rather than making you money.

    Most checking accounts charge regular maintenance fees and an increasing number of savings accounts have them as well, but they can be avoided.

  4. Go online to find higher rates

    The most recent MoneyRates.com America's Best Rates Survey found that the average online savings account rate was 12 times the average rate from traditional, branch-based savings accounts. With people doing more and more business from home due to pandemic restrictions, this might be an ideal time to change how you bank and earn more as a result.

Because the Fed has little room to move, don't expect a dramatic rate policy change to come out of next week's Fed meeting. If you want to do something about low interest rates, you need to do it yourself.


Previous Federal Reserve Board Updates articles:

FOMC Date2020 FOMC Meeting Update Articles
09/09/2020Fed Meeting Preview: Loosening the Reins on Inflation
07/23/2020Next Federal Reserve Meeting: Consumers Have More Options Than the Fed
06/04/2020Will the Next Fed Meeting Lead to Negative Interest Rates?
04/23/2020The Federal Reserve in Crisis: What's Next?
03/12/2020Next Fed Meeting Won't Solve Global Economic Crisis, But Here's What Consumers Can Do
01/22/2020January 2020 Fed Meeting - More Than Meets the Eye?

 

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