Being able to see the future can be argued as both good and bad. In the case of the Federal Reserve’s decision to start revealing target federal funds rates, the benefits certainly outweigh the drawbacks.
The crystal ball that is being handed to Americans by the Fed will cultivate a swarm of rate chasers, and possibly spur some conservative savers to dive into riskier assets.
Yesterday, the released minutes of the December Fed meeting revealed that their projections of the target federal funds rate would be made public so Americans can “better understand the Committee’s monetary policy decisions.”
These target rates will be included in a report called the Summary of Economic Projection, which is released four time each year. It’ll include projected target federal funds rate in the fourth quarter of the current year and the next few calendar years – and longer. Furthermore, we’ll get an estimate of the next increase in the target rate.
Remember that these are mere targets. The Fed’s projections certainly did not hold true when a campaign of rate reductions ensued during the financial collapse.
However, some idea of where rates are going is better than no idea.
Fed Dictates Your Savings Mentality
Obviously, the projected rate changes will aid savers in making their saving decisions – not necessarily impacting how much they save, but where they put their money.
If the SEP report says that rates will remain unchanged over the course of the next year or two, savers will no longer look to rely on bump-up certificates of deposit (CDs), which allow accountholders to raise the rate on their CD if rates increase before maturity.
For example, if the Fed projects the target federal funds rate to stay at its current level for 2012 and 2013, you’d be less inclined to open Ally Bank’s 2-Year Raise Your Rate CD (1.18% APY) and you’re more likely to stick with a straightforward CD such as the 2-year CDs from American Express Bank or CIT Bank (both at 1.30% APY).
If the federal funds rate is expected to rise, you are more likely to pick up a CD with a shorter maturity duration so that your money is locked in for too long – in anticipation of using that cash to invest in CDs with a better return.
To Be More Risk-Tolerant
In August, the Federal Reserve already announced that the federal funds rate is likely to remain at its current historic lows until mid-2013. With the new agenda to reveal interest rate projections, we get a glimpse of interest rates even further down the line.
Now, if we find that rates are expected to be low for even longer, American’s face the forked road where the left path offers dismal deposit rates and the right path contains riskier investments.
It’s very likely that assets such as stocks and real estate will occupy a larger share in consumers’ financial plans, especially for those who are young or nearing retirement without a sufficient nest egg.
In general, the transparent approach by the Federal Reserve is definitely good thing for Americans. On one end, we’ll be making smart choices on picking a savings account or CD. On the other, at the very least, we’ll have more of an incentive to learn about other investments available.
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