Dedicated to Deposits: Deals, Data, and Discussion

Fed Drops Unemployment Rate Threshold for When to Increase Rates

POSTED ON BY

The second FOMC meeting of the year ended today, and the big news was the forward guidance change in the FOMC statement. The unemployment rate threshold has been removed. With the unemployment rate nearing the 6-½ percent threshold, the Fed apparently didn’t want to make it sound that rates were going up anytime soon. Even though the Fed didn’t admit that its policy has changed, it sure seems like there has been yet another push-out of when the Fed will start to increase rates. Here’s how the statement changed from January to today:

January FOMC statement excerpt:

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. The Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent 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. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

March FOMC statement excerpt:

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. 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.

With the unemployment rate nearing 6-1/2 percent, the Committee has updated its forward guidance. The change in the Committee's guidance does not indicate any change in the Committee's policy intentions as set forth in its recent statements.

A tiny bit of good news for savers is that the Fed continues to taper its asset purchase program. This asset purchase program will have to end long before the Fed starts to increase rates. So the sooner it ends, the better.

In addition to the statement, the FOMC released its economic projections, and Chairwoman Yellen gave her first press conference as Fed Chair. One thing to note about the projections is that the year when the FOMC participants anticipate a rate hike was pulled in a tiny bit as compared to the projections in December. In December, 12 members anticipated a rate hike in 2015 and 3 members anticipated a rate hike in 2016. That has changed to 13 members and 2 members. So from this perspective, a 2015 rate hike looks likely. However, based on today’s forward guidance change, I think we’ll be lucky to see a rate hike in late 2015.

Future FOMC Meetings

The next two FOMC meetings are scheduled for April 29-30 and June 17-18. The June meeting will include the summary of economic projections and a press conference by Chairwoman Yellen.


Related Posts

Comments
6 comments.
Comment #1 by Shorebreak posted on
Shorebreak
"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."

There you have it. They can cite any perceived "economic conditions" to stretch the zero interest rate policy (ZIRP) out for an even greater extended period of time, than we currently anticipate.

11
Comment #3 by Anonymous posted on
Anonymous
When the fed's bond buying program(QE) ends the longer term yields should rise..... that is why I believe penfed gave out those higher cd rates, getting out in front of a possible rate rise.

7
Comment #37 by Anonymous posted on
Anonymous
Even the FEDs don't believe their own made up numbers about the unemployment.

3
Comment #2 by Anonymous posted on
Anonymous
I seriously doubt those of us who are of retirement age will see any substantial increase in savings rates in our lifetime.   Our national debt is out of control and would be, if it isn't already, beyond balancing if interest rates were to rise significantly.  And the pins would be knocked out from under the stock market.  Our nation's financial situation is a precarious as is world peace. 

15
Comment #4 by Anonymous posted on
Anonymous
The program of Treasury purchases was novel to begin with, hasn't truly been effective. and carries substantial risk. Basically, the Fed realizes this policy hasn't succeeded to truly alleviate the country's real economic condition, with the current 'real' unemployment rate around 13 percent, and the Fed simply realizes the Treasury purchase program needs to be halted. However, because of the country's weak economic condition, the Fed is going to continue cheap borrowing rates absent the Treasury purchase program. Until real growth comes on strong in this country, there may be some illusion of economic progress but the reality won't be there.

8
Comment #5 by Anonymous posted on
Anonymous
Interest rates are raised to tamp down inflation, not to reward savers. The official inflation rate does not support raising rates at this time. Full employment is generally followed by rising rates because more earners are chasing fewer goods resulting in inflation. The Fed knows the unemployment rate is skewed and that the economy is extremely sluggish. I also believe they know a recession could be around the corner...perhaps in another year or two. Keeping rates low is the only prudent move.

In spite of every popular notion to the contrary, business cycles are real and not to be ignored. When the stock market "corrects" due to QE tapering the wealth effect so many enjoy will quickly evaporate. When your 401K takes a 20% haircut you're less likely to run out and purchase more house or car than you can afford. As every retiree knows, the moment you start drawing down your retirement account(s) buying patterns change. When consumers hesitate we're headed towards recession. And, of course, more QE! 

6
Comment #6 by Anonymous posted on
Anonymous
(Just me thinking out loud) Not criticizing you, but "a recession could be around the corner".  When did we pull out of the Great Recessions we have been experiencing for the last several years?  Certainly the Fed's know the unemployment rate is skewed, as is the inflation rate.  But our government officials wouldn't lie to us would they? (Joking of course).  And many current retirees have already drawn down their retirement accounts.

The Fed's QE plan did not work and was extremely over played like adding gasoline to fight a fire.  If they had just let normal business cycles take their place and the economy take it's hard knocks in stride, we would have been much better off economically today. 

Real growth.  Where is this real growth going to come from?  Our country's population is rapidly growing while our manufacturing job have vastly declined.  I doubt there will ever again be enough meaningful jobs to bring bring the unemployment rate down to where it was during our most productive years.  

8
Comment #19 by Anonymous posted on
Anonymous
As an oversimplification let me say I see two forms of recession: personal and national. Based on accepted economic data the US is not in a recession. Many individuals, however, disagree because their personal circumstances dictate otherwise. It's a micro versus macro debate that is never ending.

Theoretically, the Fed's job is not to eliminate the
normal" business cycle but to smooth it out. No one wants 25% unemployment (depression level) or mortgage rates of 15% (Carter-era). Too much intervention, however, often results in a host of unintended consequences. When 26 weeks of unemployment insurance morphs into 99 weeks, one can only ask why not 990 weeks? Or, when unemployment insurance is exhausted why is it now customary to find a place in the social security disability roles...which is nothing more than permanent unemployment insurance or social security on demand. The Fed's QE is not directly responsible for these programs but I agree that allowing more banks to fail while holding more individuals accountable would have resulted in a more robust and timely recovery. QE was and is a bank bailout program, nothing more. I've studied QE and I'm not sure if there ever was a well-thought out strategy. I think it was a desperate attempt to keep inefficient and corrupt institutions afloat. It's also a great way to monetize the debt without anyone taking notice.

4
Comment #7 by Anonymous posted on
Anonymous
Our government is DEEPLY in debt.  The Fed is not going to raise interest rates until the Federal Government eliminates all its debt, which basically won't happen in any of our lifetimes.

7
Comment #8 by Shorebreak posted on
Shorebreak
"Basically, by continuing any form of QE or other unconventional monetary policy, Ms. Yellen is not feeding credit to Main Street America as might be her intention, rather, she's feeding interest income to the nation's commercial banking system.  It's great "work" if you can get it."

 http://viableopposition.blogspot.ca/2014/03/the-banking-systems-disappearing-money.html

5
Comment #9 by Anonymous posted on
Anonymous
So, is the take away, buy long term CDs now because interest rates won't rise for a long, long time?

8
Comment #10 by Anonymous posted on
Anonymous
What do you consider a long, long time?

3
Comment #11 by scottj posted on
scottj
Was just watching FOX business news and they showed the comment that Yellen made that caused the market to tank yesterday.
 She was asked how long of a gap to expect before rate hikes begin. Her reply was "the language we in this statement is considerable period, this is the type of term that's hard to define but probably means something of the order of around 6 months or that type of thing"

Market took a big spike down as soon as that came out, funny it's being called a rookie mistake for actually speaking so clear. So does this mean "considerable period" could be as short as 6 months before rates rise?


3
Comment #14 by Anonymous posted on
Anonymous
#11.... I think she said 6 months after the QE program is completely ended which would be about 6 months from now so that means a year from now but as you know, anything can change.

4
Comment #12 by Anonymous posted on
Anonymous
My question is:  is it better to buy longer term CDs now (for example 5 year or longer CDs), thinking that interest rates wont rise for a long time, or is it better to stay liquid, thinking that interest rates will rise soon?  What do you think?

3
Comment #13 by Ratesaver posted on
Ratesaver
For #12   I would say you should just buy the best rate you can at up to 5yr and staggering your buys to but by no means stop buying and wait... You will lose money in the end

6
Comment #15 by Anonymous posted on
Anonymous
Would you go longer than 5 years?

1
Comment #16 by Anonymous posted on
Anonymous
Do you keep asking because you really don't know what to do and want to know what other people are thinking or are you just messing around? 

I have at least a couple maturing every year going out 7 years from here..... would I buy a 7 year now.... it would have to be something extra special and I don't consider 2.5%, 2.75% or 3% extra special..... now if that longer term higher rate would make the difference between going into the principle or not going into the principle that would be different.

2
Comment #17 by jib2424 posted on
jib2424
I'm not messing around.  I'm trying to decide what to do and am looking for advice.  Right now I'm trying to decide if the best thing to do is to buy 5 year CDs such as the Garden Savings CD which is paying 2.53%  What is your opinion about this?

2
Comment #18 by jib2424 posted on
jib2424
Are you  saying that the Navy 3% 7 year is not something you would have bought?

2
Comment #21 by Anonymous posted on
Anonymous
I did buy the Navy 7 year and might eventually regret it but I am not buying anymore right now...... if I change my mind I will let you know.....hehe

2
Comment #22 by Anonymous posted on
Anonymous
Everyone's financial situation and outlook is different.  What fits one may not suit another.  Do what you think best suits your OWN future financial wellbeing.  In today's chaotic world of finance and unrest, nobody knows what tomorrow may bring.  Add to that, Yellen and the Feds refuse to give straight talk on what their plans are.

6
Comment #23 by Anonymous posted on
Anonymous
I agree.  But I have many 1 year CDs maturing in the next several months and I'm trying to decide what to do with the money.  I won't need the money for several years and just want to make the smartest investments I can with the funds.  I'm looking for people's thoughts on this.  Right now I'm considering opening many 5 year CDs at the highest rates I can find.  What do you think of this strategy?

1
Comment #24 by Anonymous posted on
Anonymous
You didn't say before you had MANY CDs coming due.... in that case I would put some in 5 year CDs and some in 1 year CDs if I could get a good rate.

2
Comment #25 by jib2424 posted on
jib2424
Thanks.  I have an average of about one 1 year CD coming due every month for more than a year.  Would you recommend putting half in five year and half in 1 year CDs?  Why would this be a better idea than putting it all in 5 year CDs?  Thanks. 

1
Comment #26 by Anonymous posted on
Anonymous
Do you ladder your CDs? If you don't it might be a good idea to start to now.

1
Comment #27 by Anonymous posted on
Anonymous
All depends what rates you're finding....... I have some money in pgx which is a preferred bond fund that yields me over 6%, a  vanguard high yield bond fund that yields me about 6% and I have some stocks that have decent yield BUT they all fluctuate in price.

1
Comment #28 by Anonymous posted on
Anonymous
Those bond funds sound good.  But I understand that they fluctuate in price.  Is this correct?  I am trying to construct an investment port folio that does not fluctuate in price and has very little risk.,  Within these parameters, I would like to make the best investments I can.  This is why I have invested in FDIC insured CDs.  My only question now is:  what are the best CDs to buy? Should I buy the highest yielding 5 year CDs I can find, or should I buy  shorter term CDs with the idea that intrest rates may rise and then I will regret buying the longer term CDs?  What is your opinion about this?

1
Comment #29 by Anonymous posted on
Anonymous
Do they fluctuate? Yes, sometimes quite a bit....if rates go up the price of the bond funds will go down but that's okay... if that happens I will be getting more for my CDs...... diversification.

2
Comment #30 by Anonymous posted on
Anonymous
Buy the long term CDs and worry about it later OR buy the short term CDs and worry later...hehe

3
Comment #31 by Anonymous posted on
Anonymous
There are 10 year CDs for 3.35% also.

2
Comment #32 by Anonymous posted on
Anonymous
Do you still recommend buying some short and some long?  Such as the Garden Savings 5 year at 2.53% paired with the Xceed Financial 17month at 1.50%?

2
Comment #33 by rules posted on
rules
There is only 1% difference so that works for me except 2.53% for 5 years isn't that great... a lot of things can happen in a couple years but I don't know anymore than anybody else does on what the future will bring. If you put 100K in a 2.53% it will get you $3585.00 after 17 months..... 100K at 1.5% after 17 months gets you $2125.00........nothing great any way you look at it. If instead of putting100K in one or the other you could put 50K in each one which would get you about $2855.00 which would average the 17 month period at 2.01%.

2
Comment #34 by rules posted on
rules
Then after 17 months when the 1.5% cd matures you will be left with a 43 month 2.53% cd.

3
Comment #35 by jib2424 posted on
jib2424
Would it be better to keep the funds liquid and wait for 5 year CD rates to get better?

3
Comment #36 by rules posted on
rules
Nah! 

1
Comment #38 by Anonymous posted on
Anonymous
I think investing in the five year CDs now may be the way to go.

2