As widely expected, the Fed decided not to raise interest rates on Wednesday at the end of its fourth scheduled FOMC meeting of the year.
The main justification the Fed gave for holding steady is the weak unemployment numbers. The first sentence of the FOMC statement described this weakness:
the pace of improvement in the labor market has slowed
Another factor is inflation numbers. In the first paragraph of the statement, the description of inflation was changed from “remain low” to “decline”.
Market-based measures of inflation compensation declined
One thing that suggests a Fed rate hike won’t happen at upcoming meetings is the vote tally of the FOMC voting members. In the March and April meetings, Kansas City Fed President Esther George voted against the policy of holding rates steady. This time George voted with the majority. No one dissented today with the policy action of holding rates steady.
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. Comparing today’s dot plot with the March dot plot (when the last projections were released), you can see that the expectation levels for the federal funds rate have gone down. However, the median expectation for 2016 is still two quarter point rate hikes. The median expectation went down for 2017 from four hikes to three hikes. Likewise for 2018, the median expectation went down from four to three rate hikes.
Fed Chair Janet Yellen held a press conference after the statement release. One reporter asked her if the upcoming election is having any impact to the FOMC’s decision process. Fed Chair Yellen claimed that politics have no impact, and that their decisions are based totally on the data.
The Fed funds futures are showing a falling chance of a Fed rate hike later this year. The implied probability of a September rate hike has fallen from 35% to 26%, and for a December rate hike, it has fallen from 58% to 45%.
Deposit Account Strategies
I still think banks are unlikely to move much on deposit rates until we see another Fed rate hike. The December Fed rate hike didn’t help deposit rates. In fact, long-term CD rates are lower now than in December.
The next Fed rate hike should have more of a positive impact since it will indicate that the December rate hike wasn’t just a one-time event. Of course, the markets and the economy will have to remain stable after the rate hike. If the market and the economy experience turmoil like they did in January, banks will hold off on deposit rate hikes just like they did this year.
For savers, this is yet another example of how gradual rate hikes will be. Even if the economy improves as the Fed expects, rate hikes will still be gradual. As we have seen so many times, it doesn’t take much bad economic news for the Fed to make rate hikes even more gradual.
Based on what we’ve seen with the Fed, it may not be wise to give up on long-term CDs and CD ladders. If you are worried about being stuck in low-rate long-term CDs as rates rise, you may want to put more focus on 5-year CDs with mild early withdrawal penalties. Another option is a barbell CD ladder with internet savings accounts and/or reward checking accounts. I have more details on these strategies in my article, Deposit Account Predictions and Strategies for 2016.
Future FOMC Meetings
The next three FOMC meetings are scheduled for July 26-27, September 20-21 and November 1-2. The September meeting will include the summary of economic projections and a press conference by Fed Chair Yellen.