FEDERAL-FUNDS-RATE TARGET: 1.50 to 1.75%
When the Federal Open Market Committee (FOMC) of the Federal Reserve meets on January 28 and 29, it is unlikely to announce a change in their federal-funds-rate target.
Even so, interest rates remain very much on the move, and consumers face a choice between acting in response or losing out.
Fed announcements are not the only thing that move interest rates, by the way. From loans to savings accounts, the rates offered to consumers are affected by economic factors that change every day. However, despite there being no change in its rate target since October, the FOMC is taking more behind-the-scenes steps to try to reduce interest rates.
The Federal-Funds Rate Should Remain Quiet
The FOMC made three consecutive interest-rate cuts last year, totaling 75 basis points. This was done in response to concerns that the economic expansion was weakening.
Since those cuts, the last of which was announced on October 31, recession fears have abated to some degree. The stock market surged over the last two months of the year, unemployment remained low and the pace of inflation picked up.
That means there was no new evidence to encourage the Fed to cut rates further. The Fed's outlook, as communicated following its mid-December meeting, is for rates to end this year at 1.6%, so there seems no reason to expect a change from the Fed's current rate target of 1.5% to 1.75%.
What the FOMC is Doing Behind the Scenes
When the FOMC meets, most of the focus is on the Fed interest-rate target, but there are other monetary policy tools at its disposal. Lately, the FOMC has dusted off a tool that played a big role in the recovery from the Great Recession.
Quantitative easing, which largely entails the Fed buying income-oriented securities on the open market, helps drive rates lower by increasing the demand for income-producing securities. Taking this marketplace action rather than just lowering the short-term borrowing rate for banks (which effectively is what the fed funds rate is) acknowledges that market forces play a big role in setting interest rates.
The Fed used quantitative easing aggressively in response to the Great Recession. Buying securities on the open market meant that the value of securities held on the Fed's balance sheet increased sharply, from under $1 trillion in mid-2008 to over $4.5 trillion by early 2015.
At some point, the Fed needs to normalize its more extreme monetary policies so it will have moves to make in response to the next recession. In pursuit of this kind of normalization, along with raising interest rates beginning in late 2015, the Fed systematically reduced its balance sheet holdings in 2018 and the first eight months of 2019.
Then it reversed course. In less than five months, the Fed counteracted more than half of the balance-sheet reductions it had made in the two previous years. The Fed has not acknowledged that this represents another round of quantitative easing, but the extent of the Fed's net purchases and their impact on the markets have many of the same effects as quantitative easing.
Whatever you call it, this drastic balance-sheet action suggests a fairly high level of concern about the economy on the part of the Fed late last year. So, one thing to watch for in the upcoming meeting would be comments on economic developments or on the Fed's balance-sheet actions that suggest any easing of that concern.
Fed Watch - What Comes Next
The jump in the Fed's balance sheet is not without controversy. Critics feel pumping a lot of money into the financial markets has artificially boosted the prices of stocks and bonds. This raises the problem of how to walk back those actions without causing stock and bond prices to collapse.
The ideal solution would be a resurgence in economic growth that would help corporate earnings growth catch up with the rise in stock prices. This could allow the Fed to ratchet down its balance-sheet holdings at a time when the stock market had more fundamental support.
Some key clues to whether this will play out will come shortly after next week's Fed meeting. Later in the week, the Bureau of Economic Analysis (BEA) will release its first take on fourth quarter 2019 economic growth and an update on consumer prices.
Stronger growth and firmer prices would suggest the economy is no longer on the critical list. That would allow the Fed to resume looking for opportunities to normalize its policies without disrupting the financial markets.
If those BEA announcements are less favorable, the FOMC will have to continue playing a game of economic chicken. In this case, the test of nerves involves how long to continue policies that artificially support the economy but may also increase the ultimate risk to that economy.
Money-Saving Actions for Consumers
With interest rates continuing to drop even while the Fed has held rates steady over the last couple months, some consumers stand to benefit while others stand to lose.
This depends in large part on whether you are a saver or a borrower. Savers lose from lower interest rates while borrowers benefit. However, the actions you take make a critical difference.
Savers should shop for long-term rates
If you are a saver, you can sit back and passively accept less interest on your savings as rates fall, or you can actively seek bank products that offer higher rates. The fact that the highest rates are well above the industry average means there are likely opportunities for you to benefit from shopping for savings rates.
Savers also have the option to lock up rates in a long-term CD to guard against further rate declines. In that case, shopping around is especially important because the rate advantage you find can be locked in for years to come.
Borrowers should search for lowest rates
On the borrowing side, shopping around becomes even more important than usual when rates are on the move. Some lenders react to rate changes more promptly and to a greater degree than others, so you can save by finding the lenders that have moved rates the most in your favor.
In short, the interest rates you get as a consumer may depend partly on the Fed and partly on the economy as a whole - but they can also depend largely on the actions you take.
Previous Federal Reserve Board Updates articles:
|FOMC Date||2019 FOMC Meeting Update Articles|
|12/12/2019||December, 2019 - Fed Meeting Hints Rates at a New Normal|
|10/30/2019||October, 2019 - What the Latest Fed-Rate Cut Means to You|
|09/11/2019||September 2019 Fed Meeting: How to Protect Your Money|
|08/01/2019||July 2019 Fed Meeting Raises New Questions|
|06/20/2019||Consumers Not Limited by Fed's Rate Decision|
|05/2/2019||Federal Reserve Pursues Rate Stability|
|03/21/2019||Shifting Stance: Fed Implies No Rate Increases in 2019|
|01/31/2019||Fed's Low Profile Won't Stop Interest Rates from Rising|