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Ken Tumin founded the Bank Deals Blog in 2005 and has been passionately covering the best deposit deals ever since. He is frequently referenced by The New York Times, The Wall Street Journal, and other publications as a top expert, but he is first and foremost a fellow deal seeker and member of the wonderful community of savers that frequents DepositAccounts.

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FOMC Statement: More Bond Buying & New Unemployment Threshold

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FOMC Statement: More Bond Buying & New Unemployment Threshold

In the last FOMC meeting of the year, the Fed yet again provided more stimulus with two new easing initiatives. The first one was expected. That's more bond buying after Operation Twist ends. The second one wasn't expected until next year. In a surprise move, the Fed replaced the mid-2015 date with unemployment and inflation thresholds.

Here's how the Fed described the Operation Twist replacement in the FOMC statement:

The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month.

And here's how the Fed described the new unemployment and inflation thresholds:

the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 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 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.

Only Jeffrey Lacker, the president of the Federal Reserve Bank of Richmond, voted against the policy. Lacker has been the lone dissenter at every FOMC meeting this year. According to the FOMC statement, Lacker "opposed the asset purchase program and the characterization of the conditions under which an exceptionally low range for the federal funds rate will be appropriate."

The new unemployment and inflation thresholds probably don't change things much for those of us waiting for higher rates. Both indicate a long wait, and the wait may become longer if the fiscal cliff or other shocks weaken the economy. It's hard to believe it has been almost four years since the Fed first lowered the federal funds rate to near zero.

Later today, the Fed will be releasing its economic projections and the target federal funds rate projections. This will allow us to see a date that corresponds to a 6.5% unemployment rate. Also, Chairman Bernanke will be holding a press briefing in which he'll be discussing today's FOMC policy decisions. I'll update this post with news from the economic projections and from the press briefing.


Update 4:00pm ET: The Calculated Risk blog has a useful summary of the Fed's economic projections and Chairman Bernanke's press conference. The Fed's unemployment projections show an unemployment rate between 6.0% and 6.6% in 2015. So the expectations for rate hikes is still around mid 2015 when you consider the new 6.5% unemployment threshold in the FOMC statement. Also, out of the 19 FOMC members, 13 of them project policy firming starting in 2015.

Inflation is also a factor in the Fed's decision about policy changes, but the Fed specified "inflation between one and two years ahead" in its statement. As the Calculated Risk blog post warned "inflation could increase to 3% or 4% without an increase in rates, as long as expectations remain anchored and the outlook one to two years ahead is at or below 2 1/2%."

Finally, a reporter asked Chairman Bernanke if he would accept a third term as Fed chairman when his current term ends in January 2014. Chairman Bernanke provided no hints on his plans. A new chairman in 2014 would probably do little to change the Fed's policies. If the President has to nominate a new chairman, it's likely to be Janet Yellen who is considered more of an inflation dove than Bernanke.




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Comments
42 Comments.
Comment #1 by Truthseeker (anonymous) posted on
Truthseeker
I cannot imagine why people buy bank time deposits and/or bonds given the artificially low rates created by the Federal Reserve. The only reason I would do that is if I expected to die within just a few years, before the hyperinflation. But, if that were the case, I wouldn't bother. I'd just spend my principal and have a good time.

With this new iteration of open ended non-sterilized quantitative easing, if and when the economy ever recovers, we are not going to see double digit inflation. It will be triple digit, and the 1.2% or 2% that you got from buying a 5-10 year CD or bond will not compensate for the fact that the Federal Reserve Notes you are using will be worth $0.10 in buying power.

4
Comment #2 by Paoli2 posted on
Paoli2
Truthseeker:  Isn't it enough what the Fed is doing without you popping up each time and reminding us of how black everything is going to end up according to "your" ideas?  What are you really selling?  Gold, silver, dogfood??

15
Comment #3 by Anonymous posted on
Anonymous
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Dear Mr Tumin,

FOMC >> Consistent with its statutory mandate, the Committee
FOMC >> seeks to foster maximum employment and price stability.

Excellent!  I am happy to note that our FOMC is anchoring the decision to the statutory mandate we've given it.

FOMC >> To support a stronger economic recovery and to help
FOMC >> ensure that inflation, over time, is at the rate most
FOMC >> consistent with its dual mandate, the Committee will
FOMC >> continue purchasing additional agency mortgage-backed
FOMC >> securities at a pace of $40 billion per month.

Perfect! Once again our FOMC is demonstrating that the decision to buy MBS is to try to fulfill the dual mandate.


FOMC >> To support continued progress toward maximum employment
FOMC >> and price stability, the Committee expects that a highly
FOMC >> accommodative stance of monetary policy will remain appropriate
FOMC >> for a considerable time after the asset purchase program ends
FOMC >> and the economic recovery strengthens.

Great!  And yet again our FOMC is midful of the mandate of maximum employment and price stability.


The iflation targetting done today make it clear what to expect when the inflation comes our way.  Also the rate-tieup done to the unemployment figure makes is crystal clear what it is that FOMC is trying to achieve! 

As a current voter I am very thankful to earlier generations of voters who helped create (indirectly) our FOMC, and to the successive Congresses and Administrations who helped strengthen the FOMC over years and decades.

Yours Truly.

Anonymous

2
Comment #4 by Anonymous posted on
Anonymous
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Dear Truthseeker (anonymous) - #1,

>> It will be triple digit, and the 1.2% or 2% that you got
>> from buying a 5-10 year CD or bond will not compensate
>> for the fact that the Federal Reserve Notes you are
>> using will be worth $0.10 in buying power.

What are the Federal Reserve Notes?  Surely you are referring to our Greenbacks - the only reserve currency in the world today? ... No?

If not US Dollar, what is your preference (if anything)?  ... Not the Euro ... Not the Japanese Yen ... Not the Chinese Renminbi ... Surely not the Iranian Rial?

Yours Truly,

Anonymous

5
Comment #5 by Anonymous posted on
Anonymous
Well, at least someone is happy about the current rate situation.  But I don't know why they are following Ken's site looking for the highest deposit rates if they are so happy FOMC???????????????

9
Comment #8 by Anonymous posted on
Anonymous
#5........You people are so easy to annoy that people come here to do just that. I used to do it as well, but it's so easy & unchallenging to get a rise out of most of the people here (methaphorically speaking) that I've already tired of the whole thing. :)

1
Comment #11 by Anonymous posted on
Anonymous
#8, me, annoyed.  Certainly not.  As anonymous #5, I simply made a statement and asked a question.  Now I'll ask two more questions:  If you already "tired of the whole thing", why are you still posting?  Or is all of this beyond your childish comprehension?

1
Comment #14 by Anonymous posted on
Anonymous
#11....... For mostly nostalgia my friend. But I get little joy these days from reading others reminding you guys over & over again how ridiculously silly you've all been stashing money in ever declining CD returns. Of course sometimes a little joy is just enough :)

2
Comment #6 by Truthseeker (anonymous) posted on
Truthseeker
Paoli2,

I am not selling gold, silver, or platinum. I buy these things, and my business activity has absolutely nothing to do with any of them. I do post my thoughts, because I have read this site for many years, and I feel a kinship to folks here, having always been a saver.

I tell my relatives and friends the same things. I have been telling them for years, and only one has listened so far. But, I don't let the fact that few listen stop me. The one that did listen bought gold in 2008 at around $800 per ounce, and has that security now.

I do not intend to depress people. But, reality is sometimes depressing. I, too, became very depressed, in 2006, when I first realized that government statisticians at BLS were lying to us, and the financial system was about to collapse. I didn't know what to do at first. But, that got me reading, and learning. I bought gold, back then, and it was the best decision I ever made.

5
Comment #7 by Truthseeker (anonymous) posted on
Truthseeker
Anonymous4

The Roman coinage of the 3rd century AD was also the world's "reserve" currency back then. That didn't stop it from depreciating down to almost zero. In answer to your question, no, I would not buy yuan, yen, rials, et. al. I would buy platinum, or gold, and, in fact, I did buy substantial additional quantities of platinum, when it recently dipped down in price.


2
Comment #9 by Anonymous posted on
Anonymous
Truthseeker - Buy land, it will always be disrable.  I mean farmland, not housing.  You can grow corn.  Lots of ammo and a case of MREs.

2
Comment #10 by Anonymous posted on
Anonymous
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Dear Truthseeker (anonymous) - #6,

>> In answer to your question, no, I would not buy yuan, yen, rials, et. al.

Of course ... I didn't think you would.  ;-)


>> I would buy platinum, or gold, and, in fact, I did buy substantial
>> additional quantities of platinum, when it recently dipped down in price.

Right ... Me too ... But I do not merely buy, but I sell as well at an opportune time.

 
No no ... Whatever you've written is not at all depressing ... In fact quite the opposite ... It is rather refreshing.  What I gather from you is that you value the relativey safe investments that are featured on this web-site like the CDs, Certificates, and the "Reward Checking" accounts, and you value the other relatively not-so safe invesatments like precisous metals as well.  If that's the case then, I must say that it's what I value as well.

For the record - the Roman Empire was hardly world-wide, and it follows the currency they had hardly was the reserve currency.  Vast majority of the population in the world (China/India) in Roman times has no sense of Roman Currency.  The situation now is very very different.  The BRIC countries, and the rest of the world has a very strong sense of our Greenback and as such recognize the 'value' of our currency as the sole reserve currency.  It is possible that BRICs one day will surpass the US ... but that day seems quite far away.

Yours Truly,

Anonymous

3
Comment #12 by Anonymous posted on
Anonymous
The bikering and trite comments here just demonstrate that there is no longer a need for this website.

CDs are dead forever with the redistribution bunch in charge in washington.

5
Comment #13 by Bozo posted on
Bozo
I listened to the entire press conference. In my view, the new shift to transparency and various factors, and away from the crutch of a specific date, will require sellers of CDs to come to their own conclusions regarding how to properly price CDs. Folks, that's not just good, it's great. The crutch of the date has allowed every small bank and CU to price their CDs on but two factors: (a) what others are offering, and (b) when the Fed says it will probably start to raise rates. Now, as they say, banks will have to "forecast". And that will lead to good forecasts, and bad forecasts. And that will foster competition. And better rates on the long end.

For example, assume two banks in town. By law, they can't collude. One thinks its forecast is for stellar growth, lower unemployment, and stable-to-higher inflation. It sees a 90% chance the Fed will begin to tighten in five years, so it raises its 5-year CD rate. The other bank is clueless. So it just follows the other bank. So the first bank nudges up a tad more. It's then like a gas-price war.

6
Comment #15 by lou posted on
lou
I couldn't watch the press conference, but i knew I could come here to get an excellent update from Ken. Thanks Ken for keeping us so well-informed.

PS. I hope you're right, Bozo. I would love to see the banks compete for depositors with higher rates.

7
Comment #16 by Bozo posted on
Bozo
Anon #14, an argument can be made for fixed income in a balanced portfolio. For some, the answer is bond funds. For others, the answer is a CD ladder. For even others (such as myself), the answer is both. My recently-rolled CD compares quite favorably to the SEC yield on an intermediate-term bond fund. And my ladder has no interest-rate risk. Although I agree this board could use more light, less heat.

3
Comment #17 by Teresa (anonymous) posted on
Teresa
My husband and I, and some friends and relatives, have done pretty well with rare US coins over the last 3-5 yrs.  They are tangible like gold and silver, but not volatile.  They are scarce and sought after, actually by international investors plus in the U.S.  We really didn't have to know too much about this, we hooked up with a couple 100% reliable, long-established and totally-reputable coin dealer firms in the major cities near where we live.  We have gotten about 5% to 6% return annually on our investments.  Doesn't seem to be much risk or downside, and we   were told that in better times, 7%-10% returns were common.  May be worth considering, you don't have to be an expert.

2
Comment #18 by Anonymous posted on
Anonymous
.

.

Dear Bozo - #16,

>> For some, the answer is bond funds. For others, the answer

>> is a CD ladder. For even others (such as myself), the answer is both.

And for some answer includes both of above, and extends to Structured CDs (principal is FDIC insured, interest is not) and Structured Notes (neither principal, nor interest is FDIC insured).

Yours Truly,

Anonymous

 

2
Comment #19 by Anonymous posted on
Anonymous
Buy Twinkies.  They will likely shoot up in value unless you eat them.

4
Comment #22 by Anonymous posted on
Anonymous
#19.........Instead, how about just buying the US made Twinkies packaging in bulk................then buying the Mexican made Twinkies wthout packaging in bulk................ packaging them & selling them on Ebay as US made. I'm not sure if I want to personally do this, but I'm guessing some of you might. Hell, you'd make a lot more money than chasing reward checking accounts! :)

1
Comment #20 by Anonymous posted on
Anonymous
Anonymous #13: how nice if that happens. However, i am afraid it's the other way around. One bank will predict low intereste rate for a long time, and the other bank will follow :)

5
Comment #21 by Bozo posted on
Bozo
Anon # 18. You know, I've heard those terms (structured CDs and structured notes), but have never followed through on my homework. Do you have a link where I could read up on them? Always eager to learn.

Thanks much.

1
Comment #23 by Anonymous posted on
Anonymous
.

.

Dear Bozo - #21,

>> Do you have a link where I could read up on them? Always eager to learn.

First let me give a link that will give details about the extreme risks one faces with Structured Notes (not Structured CDs).

http://www.slcg.com/pdf/workingpapers/Structured%20Products%20in%20the%20Aftermath%20of%20Lehman%20Brothers.pdf

 

I guess the information at above link will give a nice overview of risks!  Now coming to some links that have sort of educational material.

http://www.sec.gov/answers/equitylinkedcds.htm

http://structuredproducts.org/education/equity-linked-cds/


Yours Truly,

Anonymous

3
Comment #24 by Bozo posted on
Bozo
Thanks.

2
Comment #25 by ken tumor (anonymous) posted on
ken tumor
lots of people are pushing hard assets.  therefore, it's time to load up on equities.

3
Comment #26 by Anonymous posted on
Anonymous
Ken Tumor........You are not wrong,

1
Comment #27 by Anonymous posted on
Anonymous
Ken Tumor, you would Helicopter Ben so proud!  That's what he wants you to do.

2
Comment #28 by Anonymous posted on
Anonymous
Be careful.  Some people on this board love Helicopter Ben and what he has done and is continuing to do with interest rates.  Go Figure?

2
Comment #29 by Truthseeker (anonymous) posted on
Truthseeker
"Ken Tumor"

Buying equities might work for a while, but it is a foolish game. Companies all over America are already being caught between the inability of consumers to spend, because of lack of jobs, and the rising cost of commodities, driven by the corrupt Federal Reserve policies of money printing. It will get worse. The only gains you'll have, in the long run, from equities, will be countered by the depreciation of the dollar. Better, perhaps, than time deposits, right now, but when and if rates ever rise again, even a little, watch out. The stock market will collapse.

The guy who suggested buying agrcultural land had a good idea, at least a hobby farm, if you are young enough. Guns and ammo I don't think you are going to need. Law and order is not going to break down, in my opinion. If anything, this nation is headed toward even more of a police-like state. I might sympathize with someone who wants to rebel against that, under those conditions, but I am too conservative to join him on the government's hit list. It is going to be very dangerous for those who are armed to the teeth. Remember, you cannot fight a tank or an armored personnel carrier with a pistol or even a machine gun.

What we are going to see is a continued effort by the Federal Reearve to depreciate the US currency until real wages and pension obligations, in America, can compete withn the likes of China, India, etc. We will see a big loss of buying power for dollars. It will be a long process, because the government doesn't want to face rebellion, and that's why nominal wages cannot go down. It is the value of those wages which will drop.

Part of the process of intentionally depreciating the dollar is to discourage people from using alternatives. That involves controlling the rise of precious metals prices, which means that they are going to be attacked by government sponsored commercial banks, over the next few days, in response to the fact that they would otherwise be soaring. They cannot do this in the long run, however, because the process is catalyzed though futures markets, and they don't actually have the metals to deliver. This will provide an incredibly good window period for buying because the price, for a while, is going to be artificially cheap.

 

1
Comment #30 by Anonymous posted on
Anonymous
.

.

Dear Truthseeker (anonymous) - #29,

>> Buying equities might work for a while, but it is a foolish game.

Would you agree that buying CDs/Certificates might 'work' for a while?  And the time frame, such as the present time, is when it has stopped working?  If you disagree then of course what is implied is that buying CDs/Certificates is working (nicely!) currently.

>> Buying equities might work for a while, but it is a foolish game.

No ... I'm afraid not.  Neither about foilish nor about the game.  Making money is not a game (for some), rather it is as serious as it gets.  And making money surely is not foolish. ( Losing it consistently would be. )

>> What we are going to see is a continued effort by the Federal Reearve
>> to depreciate the US currency until real wages and pension obligations,
>> in America, can compete withn the likes of China, India, etc.

Again ... I don't agree.  The US dollar's depreciation would suggest rise of some currency other than US dollar to step in - instead of our Greenbacks -  so to say.  We have no alternative at all on the world scene.  

Euro?  No.

Yen?  A very very long shot.  Would the BRIC countries - most notable the China - be willing to swap the US Debt they have for Japanese Yen denominated Debt in a significant way?  ... Don't think so.

So what else?

>> We will see a big loss of buying power for dollars. It will be a long
>> process, because the government doesn't want to face rebellion, and that's
>> why nominal wages cannot go down. It is the value of those wages which will drop.

Once again the big loss of buying power of Greenbacks will mean the inflation will have to be of equally big magnitude.  FEDs have declared the inflation tragetting mechanism already.  So, the full-faith-and-credit of the US will be put into play to combat any big loss of the US dollar.  (I have not doubt that the US will pervail for the simple reason that there is no alrernative whatsoever.)

About buying the land ... maybe. But farm land?  That's doubtful.  I'd rather buy a stake into the land that our governments rent!  They take out long leases. They hardly, if ever, miss a payment. 

Yours Truly,

Anonymous

2
Comment #31 by Anonymous posted on
Anonymous
Seems to me I heard all this scare of "hyper inflation" back in the mid '70s.  Never did materialize.  In fact there were a few time after that and one period not too long ago, the big worry was DEFLATION.  Just goes to prove what the future holds is anyones' guess regardless of what some of you self proclaimed financial gurus claim.

2
Comment #32 by Wil posted on
Wil
#31: Depends on what you mean by "hyperinflation." If it means the kind of inflation suffered by Germany during the Weimar Republic, or certain Latin American countries in the not too distant past (I remember visiting Peru in 1991, and the exchange rate was almost a million of their currency to $1), then you are right, "hyperinflation" did not materialize. If, on the other hand, you mean double-digit rates of inflation, the fears of "hyperinflation" back in the 1970s were justified, as that is exactly what we had around 1980. Nobody, of course, can infallibly predict the future, but people can make reasoned expectations of probable trends. Perhaps the prudent course is to diversify your investments among different asset classes, in case your expectations prove wrong. It is also worth noting that there isn't a one size fits all: investment decisions need to be tailored to the personal needs, goals, and risk appetite of the individual. Although I happen to find CDs presently unattractive given the current rates, there are people who require the predictable income stream without risk of principal that CDs provide.

3
Comment #33 by Bozo posted on
Bozo
Wil nailed it. Although I do find current 5-year CDs competitive with the SEC yield on your garden-variety intermediate-term bond fund. But diversification, and a proper asset allocation given one's need, ability, and willingness to take risk is the key. Fixed-income is the "anchor to windward" in one's portfolio. Risk should be taken on the equity side.

2
Comment #34 by Anonymous posted on
Anonymous
Wil......I find it almost comical that anyone can use the term "income stream" to describe the returns available on CDs. I'd love to know what the threshold in people's minds need to be before that term can no longer be spoken with a straight face as it relates to CDs.

5
Comment #35 by Paoli2 posted on
Paoli2
#34  My understanding of what Wil is referring to as an income stream from CDs can still be achieved if one has an enormous amount of money in 2.5% CDs or maybe quite a few seperate CDs at this rate.  My income stream nowadays is not what it was before zero interest rates hit but I still rely on what I am getting as a part of our income.  Maybe it can be more of an "income trickle" with 2% rates but it still counts, imo.

4
Comment #39 by Anonymous posted on
Anonymous
#35, #36...........Yes, I think you've coined a new phrase with "income trickle". Much more accurate, I think.

1
Comment #36 by Wil posted on
Wil
Paoli2: Precisely! You must be practicing telepathy. So long as there is any positive interest rate at all, there is an income stream, no matter how small!

3
Comment #37 by Anonymous posted on
Anonymous
Wil:  Not really telepathy but from reading your former posts, it makes sense that we think a lot alike when it comes to CDs.  I just returned from cashing an interest check from "one" of my many banks and credit unions I deal with and it did help with paying for the groceries.  BTW, I would never put a lot of funds in "one" bank or cu at these rates.  I like to play musical chairs with my institutions if you understand what I mean (and I think "you" probably do!)

4
Comment #38 by Anonymous posted on
Anonymous
.

.

Dear Mr Tumin,

>> The Calculated Risk blog has a useful summary of
>> the Fed's economic projections and Chairman Bernanke's press conference.

Yes, useful indeed.  The projection of inflation is not merely useful, but is also comforting.  There is no double-digit inflation projected. 

As the unemplyment goes down, the easing will reduce, and then stop.  I wish that more and more of our fellow Americans will get employed fast/faster, and the easing will turn into tigthening.

We'll have to wait and watch ...

Yours Truly,

Anonymous

2
Comment #40 by Anonymous posted on
Anonymous
To sum it up, when the people on unemployment get off their lazy a$$ and get a job, the interest rates will start to rise!

3
Comment #41 by Anonymous posted on
Anonymous
An A$$ can't really be lazy or industrious.............it jpretty much just is. :)

1
Comment #43 by Paoli2 posted on
Paoli2
Hey Virginia Beach didn't I tell you my DD was off limits in your posts?  Tis the Season to be Merry!  Go aggravate Santa Claus and leave me alone!

1