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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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Fed Announces the Start of Tapering


Fed Announces the Start of Tapering

The Fed surprised most analysts by deciding to announce the start of tapering. The tapering will take effect in January when the Fed reduces its bond buying from $85 billion to $75 billion. That’s just the early start of a long tightening process that will eventually lead to higher deposit rates. However, the Fed also added language to the statement saying that it intends to keep rates low for an even longer time after the unemployment rate threshold is reached. So the long wait continues for savers.

Below is the excerpt from the FOMC statement which describes the tapering:

In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases. Beginning in January, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month.

Below is the excerpt describing the FOMC’s plans to keep rates low for an even longer time:

The Committee now anticipates, 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.

One interesting change from the previous FOMC meetings this year is a change of who voted against the policy action. The "no" vote came not from the inflation hawk, Esther L. George, but from the inflation dove, Eric S. Rosengren, who wanted to delay the start of tapering.

In addition to the statement, the FOMC released its economic projections and Chairman Bernanke gave his last 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 moved out a bit. In September, two participants anticipated a rate hike in 2016. That’s now up to three.

Future FOMC Meetings

The next two FOMC meetings are scheduled for January 28-19 and for March 18-19. The March meeting will include the summary of economic projections and a press conference by the Chairperson who will likely be Janet Yellen.

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Anonymous   |     |   Comment #1
hopefully we'll see some increase in CD rates from the greedy banks and CUs!
diversified investor
diversified investor   |     |   Comment #2
Looking to be at least 8 years of 0% interest rates. Bad time to be a saver.

Better to be a risk taker when everyone else is saving and to be a saver when risk-free yields are higher and everyone else is a risk taker. 
Anonymous   |     |   Comment #23
Market is up almost 3% in the last 2 days.
MikeS   |     |   Comment #3
In other words, if the rates go up, USA will default and therefore, the rates will be manipulated for a long long time to come ( a decade or more, I think).
The Obama deficits crated $1 trillion a year since he became president and his long term budget suggest same deficits as long as you can see. Obamacare alone will create $200-500 billions a year short fall in the budget for the next 10 years, this is according to CBC (congressional budget comity).
Anonymous   |     |   Comment #10
Simply mistaken on the facts.  Budget deficit for 2013 is half of the $1 trillion Obama inherited from Bush in 2009.  And Affordable Care Act was paid for by some taxes on incomes over $250k, which saw the largest tax cuts under Bush.  In fact non-partisan projections show ACA slightly reducing budget deficits.
Narji   |     |   Comment #12
Sorry to disappoint you, but Obama created more debt to this country than all of the presidents combined since George Washington.
You do not see the whole picture and the money shuffled around to look OK on the books. Afghanistan war is not included, ACA deficits are not included, borrowing for SSI not included, Also, the interest payments on the national debt are not included in the budget. Extra taxes on the rich account for less then 0.01% of the budget.
scottj   |     |   Comment #4
I wonder if part of the language of keeping rates low for a longer period was meant to temper the effect the tapering would have on the stock market? Which from the rally we had after announcement seemed to have worked? 
Anonymous   |     |   Comment #8
I especially agree with your comment re the Fed's longer period of low rates sweetener for "Bubbles' Spec-Casino for the wealthiest and risk-lovers". The regrettable thing in all this is the gamesmanship involved on the part of the Federal Reserve in using a dubious, unproven and risky policy that serves as an image for something that really isn't there (i.e., true progress in the real economy) along with having to do a sales job as this shaky policy is continued. Regrettable, but also truly sad because it demonstrates a sorry state of affairs that's simply being covered up..
Anonymous   |     |   Comment #13
Wrong, the interest rate on the national debt will make this country insolvent if it goes more than 3% on 10 year treasury for prolong times.
Shorebreak   |     |   Comment #18
“We will be keeping rates low well past the unemployment level of 6.5 percent,” said Federal Reserve Chairman Ben Bernanke in a press conference following this week’s board meeting. Bernanke did not specify a lower unemployment rate threshold that would indicate a rate hike. Papers published by a few Federal Reserve board members suggested that an unemployment rate threshold of 5 to 5.5 percent was more appropriate.

That won't occur in the near future. Even then, the unemployment rate "threshold" will be moved again in order to keep the zero interest rate policy (ZIRP) in effect for at least another decade.
me1004   |     |   Comment #5
This is such a tiny decrease in the amount of stimulus that it is for all intents and purposes no different than no change at all. Even if they did this much more at every single Fed meeting going forward, it would be Christmas next year before we even get QE3 rolled back. This clearly means that any uptick in interest rates for savers will be egregiously and punitively slow. It means it will be at least several years before interest rates have any chance of getting back to what might be normal.

It scares me that they are now talking about the 2% inflation target as a "goal,"  not a maximum. They are saying that they WANT inflation, not that they will accept the inevitable up to a point. This is the Janet Yellen attitude. And she is not going to allow interest rates to rise until she gets AT LEAST that 2% inflation for a long enough time to call it an established and ingrained amount. She will accept higher inflation, just not lower, so we are elikely to have periods of 3, even 4% inflation under her, as long as she can justify in her head that the higher rates will not last for long.

I'm afraid it could mean that interest rates will not be raised until inflation is already getting out of control -- thus the comment that 6.5% unemployment would not cause the Fed rate to rise above 0 -- because only out-of-control inflation will push up the Fed rate now. This is a dangerous approach, one we have previously learned the hard way could be devastating and makes it extraordinarily difficult to tame inflation again. But it is the Yellen preference. 

Many economists believe 6.0% unemployment is the best that can be without inflation getting out of control. Others disagree with that number, feel it can go lower. I'm afraid Yellen will want to go to the 3-3.5% unemployment of the Clinton years (which ended in a stock market implosion) before considering raising the Fed rate above 0%.

If so, it could be the end ofthe decade before the Fed rate is raised, meaning 10-12 years for savers to be punished for something they did not do and for reckless speculators and house buyers to be subsidized for their misbehavior. Yellen sees savers as slaves to be exploited and plundered for the benefit of the reckless. 
Anonymous   |     |   Comment #9
Today's fed statement did nothing except raise the Stock Market to increase the wealthys worth!
Anonymous   |     |   Comment #21
You make a good point re 2% being in effect a minimum inflation rate rather than a maximum before the Fed significantly increases interest rates. What that really translates to is that given today's truly weak real economy, there's going to have to be some really heavy changes in that economy--basically super-inflationary pressures that develop--before the Federal Reserve does what's required to avoid big problems: somewhat like waiting for symptoms of a serious medical condition rather than taking actions that might avoid that condition in the first place.
Shorebreak   |     |   Comment #6
I'll stick with my original prediction of perhaps 2019 before we see any meaningful increase in deposit rates. It's perfectly understandable why the equity markets continue as the place to be for yield starved investors. Of course, we may have another financial crisis in between now and then. In that event, the whole process begins again with purchases of even more bad debt by the Federal Reserve. It appears we have a circular firing squad in action between massive borrowing by the federal government and massive liquidity on the part of the Fed.
Anonymous   |     |   Comment #14
I think 2029 is better time frame. The deficits will tun for at least 10 years, therefore the rates must be low.
diversification   |     |   Comment #7
MikeS said:
"In other words, if the rates go up, USA will default and therefore, the rates will be manipulated for a long long time to come ( a decade or more, I think)."

Did you know that in the early 50's debt was just as high as now (% of GDP)? And that rates DID rise and the US DIDN'T default? And that the economy did great? And that the stock market had the best decade EVER?
lou   |     |   Comment #11
"And that rates DID rise"

Not really. Rates were very low in the 1950's. The economy of the United States is very different than what you saw in the 1950's. We were the preeminent economic power as almost every other industrial country had massive rebuilding to do because of WW II. Germany, Japan, England , France, etc were all hurting in the decade year after WW II. We literally had no one who could compete with us in those years.
Anonymous   |     |   Comment #15
Wrong, today there are 100 millions freeloader, in the 50's. less than a million. Check the facts.
me1004   |     |   Comment #19
Freeloaders? You should check into what you speak about. Many, maybe even most, of these people you call freeloaders are actually working 40 hours a week -- and still are below the poverty line. Taxpayers are subsidizing all the business that rely on minimum wage workers, such as McDonalds, WalMart and all the others. Minimum wage leaves families below the poverty line. These hard-working "freeloaders" you speak of are actually modern slaves. Its the businesses that are paying so rediculously low who are the freeloaders, leaving the taxpayers to make up the difference for the employees who are being paid below the poverty line. Those people you call freeloaders who you see using food stamps or getting Medicaid -- they're full time workers at McDonalds and WalMart and all the other low-wage businesses headed by billionaires who keep screaming how they're being taxed too much. 
Anonymous   |     |   Comment #20
Amen to me1004's comment #19!  Especially the last sentence, "headed by billionaires who keep screaming how they're being taxed too much."  More people need to realize this fact!  Thanks!
Anonymous   |     |   Comment #22
Freeloaders? Slaves? There's another take on the real problem with economies. For many decades four things have been developing that have affected economies around the world. I use a shorthand term and call them the Four "shuns (each terms ends in "tion" and the endings are pronounced the same: "shun"). The four are automation, deregulation, globalization and financialazation. These things developed at various times and at time some overlapped with others but now ALL are present in a lot of nations. The low-wage/most unskilled workers are hit the hardest by the effects of the four shuns and have the hardest time with employment and making ends meet. Regardless, none of the political, labor or business sectors in any nation I know of has been able to come up with something relatively simple that would really minimize the downsides of these four trends--that's a lot to deal with on the world's economic plate.
Shorebreak   |     |   Comment #16
Reductions of $10 billion per month to get QE down to zero by late 2014, which is a date Bernanke mentioned, and presumably the Fed then continues by commencing withdrawal of the accumulated QE at the same rate - which implies it will take 400 months for Bernanke to fulfill his promise to remove all the  money that has been created out of thin air.
Anonymous   |     |   Comment #17
Bernanke need to continue to pump up the stock market to feed the wealthy.
Anonymous   |     |   Comment #24
No one is stopping you from investing like the wealthy.
Anonymous   |     |   Comment #26
Right.  No one is stopping me from investing like the wealthy.  But the lack of millions of dollars IS STOPPING me.
Anonymous   |     |   Comment #27
You don't need millions of dollars to invest like the wealthy. That is a gross exaggeration. You need medium six figures for entry, perhaps a bit less if you're naturally astute or willing to go on an accelerated learning curve.

It will not be "risk free" however. The wealthy do take risks, sometimes big risks. The ones who aspire to wealth take even bigger risks, sometimes enormous risks. That is just the way the game is played. 
Anonymous   |     |   Comment #25
Is today's Fed not marvelous?  Not many years ago, Americans with preference to live in a managed economy needed to move to China.  No longer.  Now they can remain right here and, thanks to our Fed, live in the largest managed economy on earth!!