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Fed Holds Steady and Lowers Rate Hike Expectations for 2016


Fed Holds Steady and Lowers Rate Hike Expectations for 2016

As widely expected, the Fed decided not to raise interest rates on Wednesday at the end of its second scheduled FOMC meeting of the year.

In December it appeared likely that we would see a rate hike in this March meeting. That changed after the global economic slowdown and the market turmoil hit in January. The Fed suggested in its FOMC statement that this was one of the reasons to hold steady:

global economic and financial developments continue to pose risks.

Inflation was another reason the Fed gave for holding steady. However, the Fed did note that inflation has recently been picking up:

Inflation picked up in recent months; however, it continued to run below the Committee's 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports.

One new voting member on the FOMC is Esther George, Kansas City Fed president. She’s one of the inflation hawks at the Fed, and she was the only one who voted against holding steady with the rates:

Voting against the action was Esther L. George, who preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.

According to Reuters’ Fed dove-hawk scale, George is one of three regional Fed presidents who are on the "hawkish" side. The other two are Cleveland Fed president Loretta Mester and St. Louis Fed president James Bullard.

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 median expectation for the federal funds rate by the end of 2016 is half a percent higher than today’s level. That implies two quarter point rate hikes this year. In December, the median expectation was for four quarter point rate hikes in 2016.

After 2016, the dot plots show a median expectation for the federal funds rate to increase to between 1.75% and 2.00% which suggests four quarter point rate hikes in 2017. In 2018, the median expectation increases to 3.00% which suggests between four and five quarter point rate hikes.

For savers, it’s important to note that Fed rate hikes will be gradual. As the last few months show, it doesn’t take much bad economic news for the Fed to make rate hikes even more gradual. Thus, it may not be wise to give up on long-term CDs.

Lastly, Fed Chair Janet Yellen held a press conference that included a Q&A session. The questions and answers didn’t add much to the FOMC statement and the economic projections. However, one question got my attention. It was the very last question, and it asked if negative interest rates were something the Fed may consider if conditions warrant. Fed Chair Yellen expressed no support for the idea. She summed up by saying "negative rates is not something we’re actively considering." Of course, it’s a possibility the Fed may go down that road sometime in the future in a bad recession, but it’s not something savers should worry about this year.

Future FOMC Meetings

The next three FOMC meetings are scheduled for April 26-27, June 14-15 and July 26-27. The June meeting will include the summary of economic projections and a press conference by Fed Chair Yellen.

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Anonymous   |     |   Comment #1
she doesn't need negative rates because inflation is going to be much worse for savers
Anonymous   |     |   Comment #2
Penfed was fast to react with a new CD offer.  They lowered their 15 month CD rate to 1.16%.
Anonymous   |     |   Comment #3
We're headed for a recession but, like the past, the FED willingly ignores it. So do the bubbleheads on TV who have no interest in your financial success. Both groups want short-term ratings while the economy needs sustained growth. They should have raised rates so they can lower them in the next 12 months! Otherwise, as Janet told you, NIRP will be a weapon of choice.
Anonymous   |     |   Comment #4
The FED will continue their financial rape of prudent savers and seniors!
Anonymous   |     |   Comment #9
Did anybody really expect anything different?
Anonymous   |     |   Comment #5
That December rate hike was all she wrote. Yellen will be long gone and still the Fed won't have the guts to raise rates in face of a threatened market tantrum.
Yield Hunter
Yield Hunter   |     |   Comment #6
Keeping rates so ridiculously low serves no purpose.  It hurts the savers much more than the spenders.  It ends up giving the spenders more money to spend,[good for the economy I know], but it comes at the cost of the savers having to cut back yet again.  And the savers are the group who did it 'right' by saving for their retirement while the spenders don't have any money for their retirement because they spent it.   So the group that did it right gets penalized once again, while the group that had had no self control gets rewarded once again with lower rates!
I fully understand why we want to stimulate the economy and all that, but it's just is conceptually wrong to constantly reward the wrong side.  Especially at the cost of those who did it right.

In addition, since it has now been proven that these ultra low interest rates only work to a small degree [law of diminishing returns], I think that more people would benefit by raising them just a little.  The 'system' needs a certain amount of fat in it to function correctly and right now we are driving on 4-spare tires!  Let's at least put some normal sized tires back on the car with some tread on them.  That's not too much to ask for.
Anonymous   |     |   Comment #7
Unfortunately the Fed is being held hostage by the stock markets. The easy money enables corporations to borrow huge amounts of money to fund stock buybacks which raise the prices of their shares. Investors and economists alike view lower interest rates as catalysts for expansion.  Prudent savers are mere collateral damage in the quest for a continued bull market in stocks benefiting the top ten percent of wealth holders.
Anonymous   |     |   Comment #8
What's so "right" about saving?
Anonymous   |     |   Comment #10
If you have to ask, you won't comprehend the answer.
Anonymous   |     |   Comment #11
Without saving, you are one step to homelessness should you run out of money due to job loss, illness, emergency or other perils and the most important aspect is peace of mind.
I hope that answered you simple question.
Anonymous   |     |   Comment #17
Savings are unspent, excess capital available as a loan to others who want to build a company, expand an enterprise, dig a hole in the ground or build a skyscraper. Savings, since they represent deferred gratification, often provide the basis for a secure self-funded retirement. Savings represent thrift, self-control, discipline and a host of other positive attributes. Savings pay for a child or grandchild's education. Savings rescue  friends from imminent disaster. Savings repair the roof, the broken window and the dead heating system all at 0% interest. For the individual, a disciplined savings plan is the most important financial decision they will ever make. If you doubt me, go to Home Depot and ask the opinion of the 75-year old lady at the checkout counter.   
Anonymous   |     |   Comment #19
Why Interest Rates Are NEVER Going Back to Normal
Instead of encouraging savings – which is what you need to make progress – it (the Fed) penalizes thrift. Over the past 10 years, U.S. savers have lost nearly $8 trillion, extracted from them by the Fed’s ZIRP. While savers were punished, borrowers were rewarded. Since 1980, the U.S. economy has added about $50 trillion in excess debt – above and beyond the real output that can comfortably sustain it. This $50 trillion came not from honest work and saving. Instead, it was conjured up by banks – out of thin air.
Anonymous   |     |   Comment #12
dissolve the fed
Anonymous   |     |   Comment #18
The focus here on interest rates, negative and otherwise, is understandable.  My own thoughts go more to the possibility of a bail-in should another banking crisis emerge . . nearly a certainty IMHO.

With the interest rate thing you risk losing perhaps a tiny percentage of your savings.  With a bail-in the percentage could be far higher.  When money is on deposit with, for example, a bank, that money is property of the bank, not the depositor.  All the depositor has is a bank promise to re-pay the money at a future time in the case of a CD, or on demand in the instance of a demand deposit.  But there is no promise repayment will be in form of cash!  Here is one reference:


but you can locate many, many others if you simply Google "bail-in".
Anonymous   |     |   Comment #20
The FED is composed of liberal political hacks who have want to prop up Obama and the democratic party until the election.  Make no mistake about that.  Interest rates will never be raised until after the election.
Anonymous   |     |   Comment #21
No disagreement.  Myself?  I'm on hold for the next 7.5 months.  I want to know who is going to be POTUS from 2017 through 2020 before I buy my next CD.  Luckily for me, most of my dough remains in unmatured CDs at this time.  But anything that does mature is going straight into the MM account until November 9.  Course if Ken posts some amazin' deal I might make an exception.  But before I invest just in the run-of-the-mill I want to know who will be America's next President.  Way I figure, if Mrs. Clinton is successful things will go on about like they are already.  But if Mr. Trump should prevail, then hold onto your hat;  interest rates could really take off!

Purely from the standpoint of money, and nothing else, I will be better off with Mrs. Clinton.  This is because if rates skyrocket my Federal taxes will explode right through the ROOF!!  And I believe with Mr. Trump such a thing is possible.  All JMHO, of course. 
Anonymous   |     |   Comment #22
I'm not sure you understand the tax tables or the effect Clinton would have on your level of taxation. Rest assured, CD rates are not going to skyrocket and your dead money will be just as dead after the election.
Anonymous   |     |   Comment #23
And I'm not at all sure you understand that the amount one pays today in Federal tax is not alone determined by the tax tables.  I label you blissfully clueless.
Anonymous   |     |   Comment #24
Your skyrocketing CD rates and exploding taxation is pure fiction generated for an unwary audience. Even the roofers aren't impressed.