In its drive to return short-term interest rates to more normal levels, the Fed had fallen into something of a pattern since December 2017, raising short-term interest rates at every other meeting. The latest meeting in September broke that pattern.
The immediate cause of this change of pattern was clear from the Fed's post-meeting statement: concern over the damage done by the recent hurricanes, Harvey and Irma, in the Southeast. Whether this caution was the right response remains to be seen. But in any case, consumers may want to take this opportunity to go rate shopping.
The Fed's decision to delay rate hike
The Fed has regularly reminded people that it is juggling a mandate to nurture employment growth against a mandate to manage inflation. Though job growth has been fairly steady in recent years, today's Fed statement acknowledged that hurricane damage could have an adverse effect on economic activity in the near term.
Though the Fed made a point of saying past experience suggests the economic impact of these storms will not extend beyond the near term, the Fed will have plenty of subsequent opportunities to raise rates. For example, there are still two more Fed meetings scheduled before the end of this year, giving the Fed time to better assess the economic impact of recent hurricanes before making its next move to raise bank rates.
Impact of hurricanes on economy?
While the concern over that hurricane damage could suppress economic activity is understandable, the other side of the coin is the impact it may have on inflation. The Houston area is a key center of gasoline refining, and Florida is a major fruit-producing state. In each case, the damage done may restrict supplies and push prices higher.
Already, inflation had flared up somewhat in August, and retail gasoline prices are up by 10 percent since the middle of last month. It is ironic that, with the Fed having held off on raising interest rates for so long because inflation was too low, it should now defer raising rates when there are clear indications of rising prices.
Caution has been a recurring theme for the Fed since the Great Recession. With much of the economic impact of storm damage still unknown, the Fed's caution about raising bank rates at this time is understandable in terms of not wanting to alter a key variable while conditions are so uncertain. For consumers though, the inflationary signals should raise other alarms.
What Fed hike means for savings accounts
If your savings account, money market account or CD rates stand pat when inflation is rising, it is as bad as if your rates fell. So, consumers would be well-advised to search for higher rates to counter the impact of rising prices. The good news is that if inflationary signals continue, they might just stir up the rate environment among banks enough to make some higher rates available.
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