One important thing to note from today's FOMC meeting statement and Bernanke's press conference is that the Fed will remain on hold for a while. The Treasury securities purchases (QE2) will end this month as planned, and there was no mention of QE3. For those waiting on higher rates, that's the first step on the long road to higher rates. But the next steps may take a while, and they will depend on improvements in economic growth and employment.
The second step to higher rates will be when the Fed ends the reinvesting of principal payments from its securities holdings. In the statement, it was mentioned this was being maintained with no indication when this would end. A reporter at the press conference asked why they haven't provided any language about when this may change like they do for interest rates. Bernanke just said that they haven't made any such commitment.
The third step to higher rates will be when the Fed changes its language about rates. It continues to say the same old thing about interest rates:
The Committee continues to anticipate that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate for an extended period.
In the press conference, a reporter ask Bernanke about what is meant by "extended period". Bernanke was asked this same question in the April press conference, and Bernanke repeated the same answer of at least two or three meetings away from taking any further action.
So once this third step is reached and the "extended period" language is changed, it would be at least two to three meetings for any hope of a rate hike, and that assumes the economic recovery doesn't stall during that time.
30 Months Since the Fed Slashed Rates to Near Zero
One interesting thing to note about today's FOMC meeting is that it has been 30 months since the FOMC meeting in December 2008 in which the Fed slashed the target federal funds rate to near zero percent. I read my prediction that I made 30 months ago that ING Direct and other online banks would be cutting their rates over the next week or two. Rates did fall soon after that meeting, but they continued a slow steady fall for the next 30 months. You can see how ING Direct's Orange Savings Account rate declined since that December 2008 meeting:
- 2.75% APY in December 2008
- 2.50% APY in January 2009
- 1.30% APY in January 2010
- 1.10% APY in January 2011
- 1.00% APY today
One question that no reporter has asked Bernanke is if he had any concern for those who depend on their savings to live. I have never heard Bernanke even acknowledge that these people exist.
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 the probability of rate hikes in the future FOMC meetings based on the 30-Day Fed Funds futures prices. The probability of a higher Fed funds rate by December is 14.7%. That's down from 25.9% after the last meeting. The best we can hope for is a rate hike sometime in 2012. According to the futures market, the chance of a rate hike by next April is 33.3% which is down from 72.8% after the last meeting. And the chance of a rate hike by next June is 40.4%.
The next two FOMC meetings are scheduled for August 9th and September 20th.