Since December 2012, the Federal Reserve has linked the U.S. employment rate to its decision to raise interest rates. The guidance gave savers an idea of when their deposit rates would finally allow their cash savings to generate more interest earnings. Now, the central bank has revised its forward guidance so that the jobless rate is no longer the primary indicator of the right time to raise rates.
Previously, the Fed said that it would begin to increase the federal funds rate — currently at 0 to 0.25 percent — when the unemployment rate fell to 6.5 percent. At the end of February, the unemployment rate was 6.7 percent.
“With the unemployment rate nearing 6.5 percent, the Committed has updated its forward guidance,” the Fed in a statement following its March board meeting. “The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”
In a press conference following the meeting, Fed chairwoman Janet Yellen emphasized that an inflation rate of 2 percent is the long-term goal. According to the Bureau of Labor Statistics, consumer prices increased just 1.1 percent in the 12 month through February.
The Fed’s interest rate policy will continue to account for the unemployment rate, in addition a mix of other economic metrics, added Yellen.
Despite the major change in guidance on interest rates, the majority of Fed board members still project that rates will increase in 2015.
Short-term impact on deposit rates
Savers may be worried about being left in the dark regarding their interest-bearing accounts. Previously, tracking the unemployment rate meant that they could shuffle their savings to boost interest returns.
For instance, as the unemployment rate dropped, savers may have been less likely to open long-term certificates of deposit (CDs) for the fear of being locked into a low rate as interest rates were rising.
However, even though the Fed dropped focus on the unemployment rate, savers can still look to the inflation rate and rate projections of Fed board members to get an idea of when rates will increase.
In the meantime, it doesn’t appear that banks will make major rate changes in response to the Fed announcement.
For savers who are looking to open CDs, consider a CD ladder — it enables savers to lock in competitive interest rates at all times.
Savings Rate Report March 2014: Eyes on Revised Fed Criteria for Rate Hikes