The Federal Reserve made an unconventional announcement following its latest board meeting. The central bank revealed the economic indicators it would use to decide when to increase the federal funds rate, which affects interest rates throughout the country — including savings and borrowing rates.
“The Committee decided to keep the target range for the federal funds rate 0 to 0.25 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6.5 percent,” the Fed said in a press release.
Now, by tracking the unemployment rate, which is reported monthly by the U.S. Bureau of Labor Statistics, savers have a better idea of when the interest rates on their savings accounts and certificates of deposit (CDs) will rise. You might prepare to move funds from riskier investments back into deposit accounts or refrain from long-term CDs when the unemployment rate nears 6.5 percent.
Likewise, recognizing that interest rates are about to increase, prospective borrowers may be quick to apply for major loans to lock in lower long-term rates, before they bounce back up.
The Fed’s announcement has deviated from the disclosure of timelines for interest-rate projections, which the central bank started doing in August 2011. Following its October 2012 meeting, the Fed said that interest rates would remain low at least until mid-2015.
Revealing the unemployment-rate indicator — rather than a projection date — implies the possibility that interest rates could rise earlier than expected.
How much longer?
That said, don’t be surprised if economic growth lags and rates take even longer to rebound. In a CNBC interview, Bill Gross, manager of the world’s largest bond mutual fund, said he believes that the unemployment rate won’t drop to 6.5 percent until 2017.
However, members of the Federal Reserve board project that the unemployment rate will hit 6.5 percent in 2015 — in line with previous projections. The last time that the U.S. recorded the unemployment rate at that level was October 2008.
At the moment, the country is staring at the fiscal cliff — the possible financial meltdown that would result from a failure of the White House and Congress to reach a budget deal. “Falling off” this cliff can have two major effects on the unemployment rates. Decreases in federal spending in major industries, including defense and healthcare, could mean significant job losses. And, an ailing economy means struggling companies are likely to lay off workers in order to stay in business.
Fortunately, many economists and financial analysts believe that Congress will take steps to avoid such a financial catastrophe. “I’m hoping that Congress will do the right thing on the fiscal cliff,” said Federal Reserve chairman Ben Bernanke in a press conference.