The gloom over severely low interest rates will last longer than previously expected, according to the announcement from the Federal Reserve’s latest board meeting. The interest earnings from keeping money in a savings account or CD is likely to deteriorate, as it has been doing for the past year.
Today, the Federal Reserve released its first forecasts for target federal funds rates, which will have a lasting impact on the how much Americans will earn from stashing their cash in deposit accounts.
The Fed said that the current economy with “low rates of resource utilization and a subdued outlook for inflation over the medium run” will lead to “exceptionally low” interest rates until late 2014.
In August 2011, the Fed already made the unorthodox disclosure stating that interest rates were expected to stay at historically low levels until mid-2013. That announcement led to rate cuts to some of the most popular online savings accounts.
The current target federal funds rate is 0 to 0.25 percent and it has stayed at that level since December 16, 2008.
Since the Fed had said it would begin releasing target rate projections to the public in early January, ING Direct, Ally Bank, UFB Direct, Sallie Mae Bank, and Discover Bank have dropped rates on savings accounts and CDs.
It won’t be a surprise to see banks slash their rates even more – in preparation for the next few years.
The new forecasts only mean one and a half more years of excruciatingly low savings rates than previously predicted. In 2011 alone, CD rates fell 20% to 30%.
Optimism in the Air
Despite the Fed’s collective statement that Americans face extended periods of low rates, some members are more hopeful for the economy.
Of the 17 members that offered predictions, three expect an increase in the target fed funds rate in 2012 and another three expect the same in 2013. Five participants predict a rate increase for 2014; four for 2015; and, two for 2016.
The majority of the board believes that rates will remain at current levels from 2012 to 2014. A rare few offered projections that the target fed funds rate could reach as high 1 percent in 2012, 2 percent in 2013, and 2.75 percent in 2014. In the long run, the Fed aims for a rate of 3.75 percent to 4.5 percent.
In 2007, when 5.00% APY online savings accounts were available, the federal funds rate ranged from 4.25 percent to 5.25 percent.
Ultimately, like every person on Wall Street, no one knows what the future holds. Rather than regarding them as predictions, consider them goals for the Fed’s policy agenda – more “what to aim for” rather than “what will happen”.