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Finally, a Fed Rate Hike! What Savers Should Expect


Finally, a Fed Rate Hike! What Savers Should Expect

After seven long years, the Fed finally ends its Zero Interest Rate Policy (ZIRP) by raising its target federal funds rate by 25 basis points. Exactly seven years ago, the Fed lowered the target for the federal funds rate to a range of 0 to 0.25%. Since that time, savers have suffered from extremely low rates on their deposit accounts.

ZIRP was supposed to stimulate the economy by encouraging people to take out loans and spend money. In my opinion, it’s questionable if ZIRP really helped the economy. If it did, it took a very long time to have any impact. There is one certain thing that resulted from ZIRP: it did rob savers of billions of dollars in interest from their savings.

Now that ZIRP is history, what can savers expect? First, let’s review the FOMC statement that was released today. Below is the key paragraph announcing the rate hike:

The Committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2 percent objective. Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent. The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.

As Fed Chair Janet Yellen has mentioned several times this year, the pace of future rate hikes will likely be gradual. This is mentioned farther down in the statement:

The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

Thus, savers shouldn’t expect interest rates to rise quickly. The best we can expect is probably a Fed rate hike at every other FOMC meeting, and that will depend on consistent economic improvements. Thus, if we’re lucky, the federal funds rate may be around one percentage point higher this time next year.

In addition to the FOMC statement, the Fed also released its economic projections which include members’ expectations about future federal funds rates. Those expectations are listed in the dot plot in figure 2. As you can see in the dot plot, the average expectation for the federal funds rate is around 1.5% by the end of 2016, around 2.5% by the end of 2017, around 3.25% by the end of 2018 and around 3.5% in the longer run. The federal funds rate had been 5.25% in 2006 and 2007. Thus, it’s unlikely that we’ll see a return to the 2007 deposit rates (with savings account rates over 5%) any time soon.

Now that the federal funds rate has finally increased, how will banks respond? And how will they respond next year after additional rate hikes? On average, banks may be slow to respond. First, it has been reported that banks don’t have a strong need for deposits. As the economy improves and loan demand increases, that should change. Second, banks may focus more on restoring their interest rate margins than attracting deposits. Low rates have hurt banks by shrinking margins between their deposit rates and their loan rates. Thus, most banks won’t be in a rush to raise their deposit rates.

Even though most banks may be slow to respond to the Fed rate hike, I think it’s likely we’ll see significant rate hikes in the next month at a few banks and credit unions. Internet banks should be the first to respond. They’re the ones that are impacted the most by interest rate competition. If you want to quickly benefit from the Fed rate hike, you may have to move your money to the few banks and credit unions that are following the Fed.

Future FOMC Meetings

The next three FOMC meetings are scheduled for January 26-27, March 15-16 and April 26-27. The March meeting will include the summary of economic projections and a press conference by Fed Chair Yellen.

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Anonymous   |     |   Comment #1
It's all abount the banks again.  They're raising their prime rate and stating they WON'T be raising the deposit rates.  More greed!!!
Anonymous   |     |   Comment #2
No, I'm sure the banks WILL raise something -- not their rates, but their fees.
The reason I now "bank" at credit unions. And with Co-Op Network, there are ATMs everywhere.
Anonymous   |     |   Comment #13
Some of them already have done so - probably in anticipation of today's meeting. A good example is Union Bank, which specializes in business accounts, and has just recently notified its customers of its rate changes.
One unwritten issue is that since the recession began the Fed has essentially been propping up the U.S. Treasury / Dept of the Public Debt. How? By forcing down the Fed Funds rate, all interest rates, even long-term rates, were forced down. That means the Treasury has been able to borrow during this period at insanely low rates, courtesy of savers. Even with today's announcement, that accommodation will remain in place until rates are at levels commensurate with the real loan marketplace.
Anonymous   |     |   Comment #3
I'm stoked. As soon as I get my money out of Third Avenue I'll make a payment or two on my delinquent student loan and finally get that new car to park in my new driveway. I might even try to talk my boss into a 40 hour work week. Nah, that my jeopardize my health care subsidy.  
Anonymous   |     |   Comment #39
Why work.  Just live off the taxpayers more!
Anonymous   |     |   Comment #4
The management of Valor Credit Union wishes to thank Janet Yellen for saving the credit union from certain collapse.
Anonymous   |     |   Comment #7
Ha! Ha!  Very funny!

Seriously, I'm happy I did not jump into Valor with both feet.  That Valor special 3% deal CD will not mature until 2021!!!  Goodness knows what interest rates will be then, about five and one half years from now.  I do have one of the Valor 3% CDs.  But I did not put in a lot of money.  I have it more for insurance than anything else.  It's not looking now as if I will need the insurance. 
Anonymous   |     |   Comment #8
rates could be up and back down again before your valor cd matures
Anonymous   |     |   Comment #20
To #8.  That's why it is best to create a CD ladder.  A person can not always catch the highest rates and sometimes catch low rates.  With a CD ladder, you don't have to be so concerned.  You always catch a good average.
John Sears
John Sears   |     |   Comment #34
Wouldn't a strong 5 year CD broken up into units (say, $10K each) be advantageous over laddering, and accomplish the same thing.  A 15 mo. period with a 2.25% Barclay will yield more than 1.3%, which I believe is the highest for one year.
Anonymous   |     |   Comment #14
Unfortunately, this commenter will probably expire before that 2021 maturity date and his heirs will b cursing him from the grave.
Anonymous   |     |   Comment #5
Just keep laddering those certificates of deposit.
Anonymous   |     |   Comment #6
I will be watching to see how much, if any, impact this Fed action has on CD rates.  My benchmark is the 5 year.  For the most recent several years, the highest rate on any 5 year was 3%.  If we commence seeing 5 year CD specials higher than that, I will attribute the increase to what the Fed has done.
Anonymous   |     |   Comment #9
"As you can see in the dot plot, the average expectation for the federal funds rate is around 1.5% by the end of 2016"

I don't think I would be taking the 'over' in the over/under bet on that figure. I would be very pleasantly surprised if those expectations are borne out in reality.     
Anonymous   |     |   Comment #10
CNBC pointed out that as soon as the Fed announced the rate hike, Wells Fargo came out with a statement that it would NOT increase deposit rates, which are already extremely low. The price of gold usually goes lower when interest rates rise. Today gold went up over 1%. Business hates higher borrowing costs. Today the DOW was up 224 and other major index percentage gains were even more. It sure seems like everyone is counting on low rates for a very long time. 
cumulus   |     |   Comment #11
The NYT provides its' usual excellent summary; note:
Every other developed nation that has raised rates since the end of the financial crisis has been forced to backtrack as economic conditions proved unable to handle higher rates. Read more:
barry_NY   |     |   Comment #12
The FED rate paid to banks on excess reserves was raised to 0.50% from 0.25%  This will be an incentive for a few banks to raise reserves.  Also, the mechanism used by the FED to raise target rates is to put a squeeze on reserves by withdrawing cash from central banks by the use of Repurchase Paper, putting an additional squeeze on bank reserves.  This may force a few large banks to raise rates to bring in additional reserves.
Anonymous   |     |   Comment #15
The banks did raise rates .25%. On their prime rates do they are charging more for loans legged to their prime rates. Do the spread is a bit larger and they make more profit.
Anonymous   |     |   Comment #16
WF Prime 3.5%
WF Five-Year CD 0.35%

They are "too big to fail"
You are "too small to matter"
Anonymous   |     |   Comment #17
I missed the irony in the 3.5% vis-a-vis 0.35%
The difference is an order of magnitude.
Anonymous   |     |   Comment #18
Savers should expect exactly nothing.
Anonymous   |     |   Comment #21
I would have phrased it:  Savers should expect more but count on nothing.
Obama   |     |   Comment #19
Fond memories of 2008-09.   Somewhere in Fall 2008, I opened a 9 month CD with 3.92% rate.   When it matured in June 2009, they offered 0.75%.    Now I'd be thankful if rates ever got to 1.50%.
Anonymous   |     |   Comment #22
Who would have ever thought back in 2008 it would have been wiser to open a ten year CD at that rate.
Anonymous   |     |   Comment #23
No kidding.  I had a Countrywide CD back in 2007....at 5.45%.....Let it be said we'll NEVER see that rate again!!!
Anonymous   |     |   Comment #25
On Friday I have a Capital One 5-year CD that matures. The yield is 5.25%. I asked the customer service representative, this past Monday, if I could renew it for another five years at the same terms. I heard a lot of laughter in the background along with the expected "not a chance". Oh well, "just send me a check".
Anonymous   |     |   Comment #27
No way any 5 year CD established in late 2010 yielded 5.25%.
Anonymous   |     |   Comment #30
Mia Culpa. It was a 7-year CD issued 12/18/2008. Interest rate 5.12% Yield 5.25%. It was the first time I went out over five years on a CD.
Anonymous   |     |   Comment #24
Here we go again:
The Federal Reserve is indicating that it will raise interest rates four more times before the end of 2016, but traders in the financial markets don’t believe it. They’re expecting just two more hikes in the coming year.
barry_NY   |     |   Comment #26
And there's indications that it can go back down now that they "reloaded the chamber" if market conditions warrant. As if a 1/4 point can turn around the world economy.
Anonymous   |     |   Comment #28
The world economy is growing, - as is that of the US.  What's the problem?
Anonymous   |     |   Comment #29
Growth has been fueled by consumption and malinvestment(s). Peak debt is a point where an entity can assume no further debt. We are there along with many other countries. Peak debt reduces consumption, economies falter and recession is the outcome. When newly minted college graduates cannot service student debt (though they buy homes, i-everything and $4 lattes) we as a nation have a very serious problem. Student debt exceeds credit card debt. Think about that, check the default rates and then study peak debt. It's an eye opener.
Anonymous   |     |   Comment #31
Unemployment.  And it will always be a problem going forward.  There will never be enough jobs for the masses.  Automation does have it's downside.
Anonymous   |     |   Comment #32
There will always be unemployment. Some people want to live off the taxpayers for life.  They have no desire to better themselves or work.  This group is only getting larger thanks to the past 9+ years of freebees!!!!!
Anonymous   |     |   Comment #35
"This group is only getting larger thanks to the past 9+ years of freebees!!!!!"

LOL. I love it!

Commenter #32 is trying to slam Obama, but isn't capable of performing simple math.

HINT: 2015 - 2009 (the year Obama took office) = 6 (not 9).
Anonymous   |     |   Comment #36
Obama can't either.  Math is not his thing.  For example, a current USA debt approaching $20T makes no impression on him whatsoever.  And the Hildabeast is unable even to understand how a FAX machine works!!  
Anonymous   |     |   Comment #37
And, Congress passed all that debt that the president signed into law!
Anonymous   |     |   Comment #38
The present gargantuan (and deficit expanding) spending bill was written by the Republican controlled Congress  under the tutelage of its new Speaker Paul D Ryan.  Let it not be said or implied it was President Obama's or his Administration's handiwork.  He agreed to sign it, but it was Ryan's baby from start to finish.
Anonymous   |     |   Comment #40
I recently saw a college student screaming, "pay my loans college should be free", and I thought how sad. His buddy graduated high school, could not afford or qualify for college, went to work in the shipyards where he paid taxes for four years only to find out that his "college-enabled buddy" is now demanding a free ride on the back of his hard-earned paycheck. The horror is that some politicians are more than eager to enact such destructive economic and social policies.
Anonymous   |     |   Comment #41
And, some "college-enabled buddies" look for ways to move ahead!
Anonymous   |     |   Comment #44
Of course they do. The problem is that the minority that wants someone else to pay their bills is growing. The danger is both economic and moral. I spent many years in and on a college campus as a student, teaching assistant and professor. Not once did I hear a student argue for a handout, a safe place or the enforced silence of others. Students attended class, worked hard or flunked out. Oh, and dorm rooms were spartan, functional and affordable.
Anonymous   |     |   Comment #42
Today's reality.  So sad!
Anonymous   |     |   Comment #43
My comment, #42, was meant in reply to comment #40.

"college-enabled buddies" should look for ways to move ahead on their own merits.  Not at the expense of the working man. 
Anonymous   |     |   Comment #45
There are society "rules" and then there are rules...does one really expect an 18 year old to not (usually) follow the advice of their parent/grandparent, i.e. let's see what can done under the current rules to get into college or....   If one does not follow the current rules, are "you" helping that child?  And, this assumes "you" have tried to change the rules to...and have (or have not) been successful.
Anonymous   |     |   Comment #46
I expect borrowers to repay THEIR loans, which benefited THEM, with THEIR money.
Anonymous   |     |   Comment #47
And, if the terms thereof allow them to do (blank)...by law that should be ok, too!
Anonymous   |     |   Comment #49

Nothing wrong with that.  I believe in personal responsibility.

You borrowed it.  you owe it.  YOU pay it back.  End of lecture.
Anonymous   |     |   Comment #50
My point was the insanity of retiring and collecting social security while you still owe money on student loans. Student loans are supposed to be the burden of 20 and 30 year olds, not pensioners! What a country we've become.
Anonymous   |     |   Comment #51
Understood.  I agree with you 100%. 
Anonymous   |     |   Comment #52
Nothing against additional education?
Anonymous   |     |   Comment #53
They are DELINQUENT loans that are only repaid through confiscation of social security payments.
Anonymous   |     |   Comment #54
really, is this done for ALL loans? or just the federal ones? if its for all than the gov is taking federal money to give private loan co.
Anonymous   |     |   Comment #55
on the other hand, taking out a loan to educate the mind is different than taking a loan for real property, the property can be repo'ed to recover some of the loan value, they can't repo the brain after they have the education. So I can understand in a way the draconian way this repayment thing was setup, but I still can't see the gov taking money from SS for a private loan, let the Co.that loaned it  deal with that.
joe   |     |   Comment #57
I'd bring back the 70's-80s with all its problems, in a heartbeat to get those unbelievable savings rates.  People were getting upwards of 12% on cd's!!!  I need at least 7% now!
Anonymous   |     |   Comment #59
Well, Joe, we'll get right on that 7% for ya! Remember mortgage rates back in those good old days?
Anonymous   |     |   Comment #62
I remember those mortgage rates back then.  Ours was 7-1/4 %.  We didn't cry about it, just accepted it.  We didn't bite off more than we could chew (monthly payments).  Purchased a modest house, 1200 square feet, took very few vacation trips and did without a new vehicle for years.  Worked hard, paid off our mortgage and today we are living comfortably with no debt.
Anonymous   |     |   Comment #63
Check the double digit mortgage rates between '78 and '88. Joe doesn't understand CD rates are the low rung on the interest ladder and high rates simply indicate high inflation and interest rates.
Anonymous   |     |   Comment #60
Joe....new world order!  Have to save more!