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"Exceptionally Low Rates for Extended Period" Continues - Best Options for Savers?


The FOMC policy meeting ended this afternoon, and the press release looks very similar to April's press release. The Fed continues to say the same thing about keeping the federal funds rate exceptionally low for an extended period:

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

The FOMC painted a less rosy picture of the economic environment as compared to April. There was no mention of housing starts edging up and it alluded to the debt problems in Europe as a cause for financial conditions becoming less supportive of economic growth. In addition, the FOMC noted that "underlying inflation has trended lower" unlike in April when it just said "longer-term inflation expectations stable".

The one positive sign for those hoping for a rate hike in the not so distant future is that Thomas Hoenig again voted against this policy. He remains the lone dissenter with the same reasoning as before:

Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a build-up of future imbalances and increase risks to longer-run macroeconomic and financial stability, while limiting the Committee’s flexibility to begin raising rates modestly.

How Long is an "Extended Period"?

The question for savers is how long is an "extended period". If it's going to be 5 years, then it can make sense to favor more 5-year CDs rather than savings accounts. If it's going to be 6 months, you may want to favor savings accounts more. Another factor is the growing government deficits and the affect on long-term interest rates. The reader Mike pointed out in the forum this commentary by Alan Greenspan in which he warns against losing a sense of urgency to rein in budget deficits. In the commentary Greenspan makes the point that long-term interest rates could rise fast at some time in the future:

I grant that low long-term interest rates could continue for months, or even well into next year. But just as easily, long-term rate increases can emerge with unexpected suddenness. Between early October 1979 and late February 1980, for example, the yield on the 10-year note rose almost four percentage points.

So I'm afraid this doesn't make it any easier for us savers. If rates rise sharply like what Greenspan described, you will regret those long-term CDs. On the other hand, if rates stay low like they have been in the last two years, you may wish you had opened more long-term CDs. In my opinion, the best way to deal with both possibilities is a long-term CD with a small early withdrawal penalty. Ally Bank's 5-year CD which has only a 60-day interest early withdrawal penalty is one example. I have more details about this early withdrawal penalty in this Ally Bank blog post.

Future FOMC Meetings

If you want an idea about what the market thinks regarding when the Fed will start hiking rates, check out this CME Group FedWatch tool. It shows you the probability of rate hikes in the future FOMC meetings based on the 30-Day Fed Funds futures prices. The final four FOMC meetings for 2010 are scheduled for August 10, September 21, November 2-3 and December 14.

Related Posts

Anonymous   |     |   Comment #1
"I am S O – B O R E D of all the Fed chatter. Its become meaningless blather, as we now know they are not going to tighten til around 2020 or so."

--Barry Ritholtz - June 23rd, 2010
Anonymous   |     |   Comment #2
I don't expect much movement in the Fed rate, so I decided to lock in 1/2 of one of my account balance into a 3 year CD at 2.75%.
Anonymous   |     |   Comment #4
I am sorry to have to say this, because I was a saver also, until I learned what the financial system is really all about.  As savers, you are simply used as saps from which to steal money through stealth taxation, by creating inflation.  When you subtract inflation from the current rates, you are getting paid negative interest at ALL banks.  Then, when you subtract the taxes you pay on inflation created "gains", you get ****ed twice.

There is a man more foolish than any that has ever before been Fed Chairman, who believes that printing money will save us.  He has violated the sacred bond between fiat money provider (the Fed) and the People.  He has printed funny-money dollars and given them away to his friends at the big manipulative trading banks, who are a part of the worldwide banking mafia (I am talking about GS, JPM, BAC etc., not the more honest regional and local banks).  Benjamin Bernanke will destroy the U.S. dollar within a few years in order to assist the U.S. government in paying promised entitlements where the promises cannot be kept except by deflating the currency with high levels of inflation.  Fixed income products, like CDs, will be worth next to nothing, overnight. 

I suggest that you buy gold, as I have, and ditch your bank accounts, bonds, etc. before it is too late.  It earns no "interest" but, then, interest rates are so low now that they are irrelevant.  They will only rise when inflation becomes so high that the interest payment will still be meaningless, even though it may be 20% per year.  Right now, with the true inflation rate, free of government lies, at 6.8% (see shadowstats.com), interest rates are already deeply negative.  This means you are paying money for the privilege of holding money in bank accounts.
rosie43   |     |   Comment #5
Dear anonymous #4. I wish you well. You sound like you are into this hype "buy gold." You sound so young. You could not have lived thru the last gold hype of the 80's. It is only the hype that is pushing gold up. Just ask how many made themselves millionaires in gold trading. If this Williams guy that writes shadowstats.com were so right about things, why is he writing articles trying to sell them to make a living? You paid? You subscribe and is he living off his gold or your money? Think about it.
ct (anonymous)   |     |   Comment #6
another good tactic, although time consuming, is to create lots of smaller amount CDs of the same CD so you can break portions of it if things go crazy.


because rates are so low right now, if you think rates might jump crazy high, you'll make back the penalty amount fairly quickly because hte penalty is based on the low interest rates, while still hedging your bet and earning a higher rate in a long term CD in case the craziness doesn't happen.
snipeman (anonymous)   |     |   Comment #7
I don't think there is any advantage in lots of little CDs - the penalty % is the same no matter what.  What is important when buying long CDs today is research the penalty for early withdrawal.  I'd take a 2.5% 5yr with a 3 month penalty over a 2.75% with a 1 year penalty.
Anonymous   |     |   Comment #8
hey, what bank offers 3 year at 2.75% APY CD?
Anonymous #4
Anonymous #4 (anonymous)   |     |   Comment #9
Hi, Rosie.  Contrary to what you may think, I DID live through the gold craze of the 1970s, and note that the metal started at $35 per ounce, and rose to $850, and, eventually fell back to just under $300 per ounce by 1999, which is still just shy of 9x where it started.  So, yes, gold is starting to go up wildly, just as it did in the 1970s, and it will probably end 9x where it started in 2007, when the money printing mania of the Federal Reserve first began.  But, before it drops down to 9x $700 per ounce, or $6,300, it will probably get to about $14,000 per ounce or more, just as happened in the 1970s.  I hope to get out, and back into CDs by that time.

The big mistake that you make is to buy CDs are guaranteeing you a loss every year.  Those losses will steepen as the world continues to lose faith in the guardians of our fiat money system.  Holding cash insures that you are paying the bank, rather than the reverse, and, after taxes, the result is even worse.  At least money markets can be traded for real goods, on a periodic basis, but, with CDs, locked into long terms, you are sure to lose a fortune as the dollar, pound, Euro, and all other paper money continuously loses buying power value.

Bonkers Ben Bernanke, and his cohorts at the world's other central banks, just printed trillions, conjured the cash out of thin air to give to their buddies at the big banking mafia banks.  Do you really think that increasing the monetary base by 3x in a space of a year or two will not devalue the buying power of your paper cash, and paper money in banks?  Think again.

The best thing you can do now is take big loans to buy real goods, not make big deposits like most people are trying to do.  Better, of course, to wait for the temporary deep deflationary depression that is about to happen.  Then, take your loans, and watch, as Bonkers Ben reflates everything with wild abandon, dropping several trillion from helicopters to initiate yet another fake Wall Street "rally", and executing another blatent theft from honest diligent savers like you, and (formerly) me.
ogrady (anonymous)   |     |   Comment #10
right on rosie you are the best how u been snipe man have not seen you in a while  dial up is the best
Anonymous   |     |   Comment #11
The time to buy gold has past.  That is when it was priced around $300 @ ounce.  Not now at $1200 @ ounce.  Way too much uncertainty in the markets world wide.  Worst case being, things can go really bust causing a severe depression taking your gold along with it.  In that scenario, cash would be king.
Anonymous #4
Anonymous #4 (anonymous)   |     |   Comment #12
Hi, Rosie & Anonymous #11

People who save are good people, so I think it is worth one more attempt to convince you to see common sense, even though you probably will refuse to do so, and everyone is going to pan this post with negative votes.

But, the simple reality is that cash will NEVER be King.  Did it become King after Lehman Brothers failed?  Nope.  They just hyperinflated the stock market with newly printed funny money, to the tune of $1.75 trillion on top of an original Federal Reserve monetary base of only $900 billion.

The international banking mafia has learned that their slush fund (aka Federal Reserve) can print funny-money at any time, to pump up the stock, bond and commodities markets at will. It is counterfeit cash but indistinguishable from the real thing, because the counterfeiters are the same as the printers of the real money that was exchanged for value. 

To reflate the financial markets, all Bonkers Ben needs to do to wipe out your "cash is king" scenario, by converting depression into inflation.  This is easily accomplished by printing counterfeit money, as was done after the failure of Lehman Brothers, Washington Mutual and the Icelandic Banks. 

Between March 2009 and April 2010, the Fed printed $1.75 trillion of that.  The Bank of England printed $350 billion more worth of pounds. The ECB refuses to admit that it printed new money, until after the Greece debacle, but admits to giving out about $1 trillion in renewable "loans" (seemingly endlessly renewable) to member banks at nearly zero percent interest.  That is as close to monetizing debt as you can get while keeping plausible deniability.  Since the Greek affair, however, the ECB has bought about $50 billion plus worth of government bonds, so, it also is printing funny-money.

Do you really think that these corrupt Central bankers, like Bernanke, won't print a few trillion more in order to prevent cash from becoming king, and the stock market from crashing, leading to big banks and insurance companies failing?  Think again!  Buying long term CDs, except perhaps from a bank like Ally which allows you to break them with only a two month penalty is foolish.

Anonymous   |     |   Comment #13
to 12 your monologues are what would appear to be most self serving and  rather long winded the attention spend of the average investor is not that long trust me as being a retired broker from one of the big firms which is why i remain anon you would be amazed as to the blank stares one receives at even the simplest conversation regarding  investments
lady marmalade
lady marmalade (anonymous)   |     |   Comment #14
why would anyone take a penalty on a cd unless you neeed the cash to avoid eviction or to bury one it makes no cents and dollars 4 that matter
cactus   |     |   Comment #15
Some institutions let you withdraw part of a CD and just pay the penalty on the portion you withdrew. If it is a jumbo CD, you can't do that.

If you are unsure when you will need the money, it is better to buy small CDs, as long as you are getting the best rate. Then you can close the CDs if and when you need the money.
Anonymous   |     |   Comment #16
To Anonymous # 4.

"The best thing you can do now is take big loans to buy real goods, not make big deposits like most people are trying to do."


This is the kind of mentality of the pre-2008 economic collapse mindset.  I have 7 TVs, 3 laptops, 4 desktop computers and numerous printers and monitors.  Should I continue buying more?  I guess I should buy some extra cars (I have three) and several vacation homes too?  Borrow and leverage my way to becoming a tycoon and forego savings.  Gold may continue to shoot up.  Well, people thought that real estate prices would go up continually too as prices soared.  Prices in one area of the city went from the low $20K to close to 1 million in 40 years.  If this continues, then in the next 40 years, the homes will cost $50M.  Imagine, the median annual salary willl be $1M in order to afford those elevated prices.
Anonymousfg (anonymous)   |     |   Comment #17
and if your credit score iis not 900 plus how can you get a reall big loan who buys cds anymore over 60 percent of my portfolio is in bonds  all getting a min of 5 percent double a quality and 10 years or less  or a good mutual fund class c only that will generate 4 percent the thing that should concern people the most if the studies are accurate that the average 60 year old has only 50 k in assets
Anonymous #4
Anonymous #4 (anonymous)   |     |   Comment #18
Anonymous - #16

I do not suggest that you take out debt to buy consumer items.  That will never increase your wealth level.  Rather, I suggest that you take out debt to buy temporarily deflated real assets, assuming that Bonkers Ben waits until another deep downturn in the markets, before he starts his monetary diarrhea again.  I do believe there will be a deep double dip, and this will be used as an excuse for the international trading bank mafia to demand more funny-money printing by Bonkers Ben, and the other corrupt central bankers.

Meanwhile, the best thing to do is to keep your cash in the highest paying money market accounts you can find, and have it ready for mobilization.  We may never see cheap gold again, because the non-banking mafia connected central bankers are heavily buying it, in preference to the U.S. dollar.  However, we will probably see cheap stocks and cheaper PMs, other than gold, when the crash happens again.

If you are tied up in CDs, you will not be able to mobilize your cash, especially if you have high penalty CDs.  That is why the only CDs worth considering would be the Ally Bank ones, and/or other banks that offer minimal early withdrawal penalties.  Once the sh-- hits the fan, and the monetary diarrhea of the banking mafia central bankers starts flying all over the place, it will be too late.  You will be trapped inside 3% or even 2% types CDs, with no way out, as rates skyrocket to 10, 20 or even 50 or 75% as America and the western world enters a hyperinflationary spiral.

As I said, savers are good people, far better than the speculators who have so greatly benefitted by all the manipulations over the last 2 years.  It is a shame that most savers are going to allow their governments and the banking mafia to steal their money through the stealthy inflation tax, and wipe them out simple because they follow an inflexible investing philosophy. 
Anonymous #4
Anonymous #4 (anonymous)   |     |   Comment #19
Anonymous - #13

One more thing...how can my posts be self-serving?  I gain nothing by expressing these views, except the satisfaction of, perhaps, helping someone like me that has not yet realized the foolishness of buying long term CDs and bonds.  Back in 2006, I foresaw the financial crisis, and bought gold with every available penny.  Unfortunately, I, like many of you will be, was locked into long term CDs that had heavy early withdrawal penalties, and I did not have the courage of my convictions to accept a 6 month to 1 year hit on interest in order to sell them, and use the money to buy gold.  I, like you all, have lost heavily as a result.  Anyone who believes the government's inflation statistics, and doesn't believe www.shadowstats.com ought to go shopping in their local stores.  Prices are way up for just about everything.  I rented a car for a week, in Denver, in 2000, for example, for $110 per week.  Just looked again, and the cheapest rental at the airport was $330 per week.  I just got back from assignment in Europe for 3 months, and when I returned to the States, I found that my favorite grape juice at Walmart cost 20% more than it had 3 months before.  My favorite cookies had inflated by 30%.  So, when that shadowstats economist Williams claims that inflation is running at 6.8% per year now, I think he is seriously undercounting.
Anonymous   |     |   Comment #20
I should add a caveat to my statement that people should go into debt to buy temporarily deflated assets in the next deep dip.  One should never use margin to buy gold, or stocks or any other thing that is sold on the markets, because the prices of all assets are volatile and you will lose big if you have things sold out from under you simply because you've picked the wrong time to get in. 

A good thing to go into heavy debt to buy, however, is real estate, when it finally reaches its bottom.  Many banks are desperate to approve almost any reliable person for up to a 90% loan on properties selling, in some areas, for 60% off their highs.  This is well worth going into debt to buy, so long as an active rental market exists that will allow you to cover the mortgage.   Perhaps, you can limit yourself to a 50% credit in order to insure you don't have problems if you can't keep it perpetually rented.
Anonymous   |     |   Comment #21
Real estate is the one that thing that triggered the 2008 near collapse.  Many people played real estate like stocks and now many are "under water" as a result.  And then you have those fancy loans that they invented to bolster the run up in prices.

In the paper they talked about this guy who bought a tiny two story townhouse back in 1980 and wanted several million dollars for it (he paid $100K for it).  A developer offered him over $2 million and he would not accept it.  Now it is listed for $1.75M and there are no takers.
Anonymous #4
Anonymous #4 (anonymous)   |     |   Comment #22
Anonymous#21, there is a difference between buying real estate during a bubble and an irrational high, and buying on a deep deflationary dip, just prior to the time Bonkers Ben Bernanke, who is fairly predictable, will send out his money-drop helicopters to distribute another few trillion in newly printed funny-money dollars to his friends at the international banking mafia (remember, I do NOT include community and regional banks who really do banking in my definition of the banking mafia).  Investing upon the big dip, especially with some level of mortgages at the extremely low rates now prevailing, would lead to big profits, instead of the assured loss every year on investing in long term CDs.
Anonymous   |     |   Comment #23
Remember, when you are paying on a mortgage of 4.6%, for example, and the inflation rate goes to 20%, you are going to make a net profit of 15.4% before taxes on money that isn't even yours.  It is the reverse of buying a CD from the bank.  On the long term CDs, you lose every year, because real inflation (when you subtract the "hedonic" adjustments made by the government and calculate based on the formula from 1982) far exceeds the current yields, and the likelihood is that inflation will increase from here, NOT decrease.
AnonymousE (anonymous)   |     |   Comment #25
Anonymous   |     |   Comment #27
Comment 10 and 24 are also missing.