Fed Meeting: Zero-Rate Policy Continues - Strategies for Savers

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As expected, the Fed didn’t announce any policy changes at the end of its two-day meeting. No changes were made to interest rates or asset purchase plans. All policy sections of today’s FOMC statement were exactly the same as those in the September statement. Only the section that includes an overview of the economy had any changes, and those changes were minimal. Here’s the part of the policy sections describing interest rates:

The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.

No one dissented at today’s meeting. One of the dissenters in the September meeting, Minneapolis Fed President, Neel Kashkari, was absent from today’s meeting due to the birth of his son on Tuesday. San Francisco Fed President, Mary Daly, voted in his place.

There were no updates to the Summary of Economic Projections (SEP). Updates are only provided at every other meeting. The December meeting should include updates.

Press Conference

Fed Chair Powell was careful not to comment about the election. When asked if the Fed had any discussions about responding to market turmoil or other economic consequences that might come from an election outcome with no clear winner, Fed Chair Powell said that he was “very reluctant, as you would imagine, to comment on the election directly, indirectly at all.”

In Fed Chair Powell’s opening remarks, more details were provided of the Fed’s latest view of the economic recovery:

Economic activity has continued to recover from its depressed second-quarter level. The reopening of the economy led to a rapid rebound in activity, and real GDP rose at an annual rate of 33 percent in the third quarter. In recent months, however, the pace of improvement has moderated.

[...]

The housing sector has fully recovered from the downturn, supported in part by low mortgage interest rates. Business investment has also picked up. Even so, overall economic activity remains well below its level before the pandemic and the path ahead remains highly uncertain.

In the labor market, roughly half of the 22 million jobs that were lost in March and April have been regained as many people were able to return to work. As with overall economic activity, the pace of improvement in the labor market has moderated.

[...]

As we have emphasized throughout the pandemic, the outlook for the economy is extraordinarily uncertain and will depend in large part on the success of efforts to keep the virus in check. The recent rise in new COVID-19 cases, both here in the United States and abroad, is particularly concerning.

Today’s Fed meeting and press conference just reinforced the slow-recovery scenario in which it takes multiple years before the economic numbers fully return to the pre-pandemic levels. Combine that with the Fed’s new inflation strategy, we may not see a Fed rate hike before 2025.

Future FOMC Meetings

The next three FOMC meetings are scheduled for December 15-16, January 26-27, and March 16-17. The December and March meetings will include the summary of economic projections. All meetings now include a press conference by the Fed Chair.

Strategies for Savers to Maximize Cash Yield

As I’ve been reporting for the last month, this zero-bound period is now worse for deposit rates than the zero-bound period from 2008 to 2015. Deposit rates have fallen much faster and lower this time. For example, it took about 37 months after the Fed started its zero bound policy in December 2008 before Ally Bank’s online savings account yield fell to its pre-2020 low of 0.84%. For Discover Bank’s online savings account, it took 39 months to reach the pre-2020 low of 0.80%. It took just over six months after the Fed started this new zero-bound period in March for Ally and Discover online savings account yields to reach their new low of 0.60%. Other banks such as Barclays and Capital One have lowered their online savings account rates even lower.

Update 11/6/20: Discover Bank just lowered the rate of its Online Savings account from 0.60% to 0.55%.

The best hope for savers is that the economy is able to have a strong recovery in the next year. That will boost the stock market which will encourage investors to move their cash out of banks and into stocks. A strengthening economy will also boost loan demand which will force banks to increase their deposits. That leads to higher CD rates and more CD specials.

During the 2008-2015 zero-bound period, there were a few rare times when 3% CDs came out. The best example was in late 2013 and early 2014 when PenFed offered long-term CDs with yields just above 3%. Based on what we’re seeing with online CD rates in the last few months, I doubt we’ll see any 3% CDs in the next two years, but a few rare 2% CDs are possible, especially if the economy has a strong recovery. We have already seen a CD special with a rate near 2%.

With at least some possibility of 2% CD specials in 2021 and 2022, locking into today’s low-rate long-term CDs (see latest CD summary) doesn’t seem like a good strategy. That’s definitely the case with most online banks, which are offering 5-year CD rates under 1%. If we do start to see 2% CDs in 2021, it’ll be better to keep cash in online savings accounts and/or high-yield reward checking accounts. Then you’ll be able to jump on those CD specials when they appear.

There are still many reward checking accounts with yields of at least 2%. Of course, these have balance caps (typically $25k or lower) and monthly activity requirements to qualify for the high yield. Also, it’s likely we’ll see some rate cuts and balance cap reductions. However, many reward checking account rates held up fairly well during the 2008-2015 zero-bound period.

Long-term CDs now only make sense if we’re headed back into a long period of very low rates. In that case a 1% long-term CD will be better than a top savings account with a rate under 0.50%.

It’s wise to remember that no one can predict future interest rates. So if you want to keep things simple, a CD ladder of long-term CDs is always a useful strategy for your safe money. If you’re worried about being locked into a low-rate CD if rates should happen to rise, choose long-term CDs with early withdrawal penalties of no more than six months of interest.


Comments
milty
  |     |   Comment #1
A couple points: 1. "The housing sector has fully recovered from the downturn, supported in part by low mortgage interest rates." I would say supported mostly by low mortgage rates. This recalls the housing speculation/flipping mania that lead to 2008 recession. 2. Referring to a pandemic recovery, "That will boost the stock market which will encourage investors to move their cash out of banks and into stocks." I think this ship has already sailed as well (since 2009, actually), contributing to even further asset inflation. Per today's CNN article regarding why Wall Street is currently celebrating : "Although a smaller relief package could hurt the real economy, it also means the Federal Reserve won't be in a rush to raise interest rates. That's a positive for the market because rock-bottom rates force investors to bet on stocks." It seems at some point all this speculation (based on the gamble that housing and stock values must perpetually grow to the sky) will end badly, but until it does, savers will continue to be sacrificed. It is hard to see that some unemployment or CPI number will change this versus a real policy that rewards savers.
P_D
  |     |   Comment #2
Not that I would ever differ with CNN, but I think the reason for the increasing stock prices in the past few days is something completely different. The stock market is discounting a dramatic change in the probability of increased taxes and other stock market depressing policy implementations compared to the previous predictions.

The worst scenario for stocks is increased taxes and particularly increased capital gains taxes. In the past few days it became apparent that the predictions that the political party that is pledging to increase taxes (including capital gains taxes) will sweep both houses of Congress were likely wrong and that in fact the tax cut party will both retain control of the Senate and actually gain more seats in the House.

This means that even if the tax increase party takes the White House, the chance that they will be able to pass the promised tax increases is greatly diminished. More likely there will be legislative gridlock creating a firewall and blocking all such stock market depressing legislation from being passed.
#3 - This comment has been removed for violating our comment policy.
#4 - This comment has been removed for violating our comment policy.
BigAl
  |     |   Comment #6
That "firewall" will also block TRILLIONS of dollars of stimulus and infrastructure spending, which would have sent the stock market skyrocketing.
P_D
  |     |   Comment #9
#6 Since the Republicans have consistently said all along that they support stimulus and infrastructure, there is no evidence to indicate that they are any less likely to approve either of these than they have been all along.

They have also consistently said that they will NOT approve any tax increases.

So you are offering an apples and oranges argument.
milty
  |     |   Comment #7
I actually do not think that your view and CNN's article are diametrically opposed--both believe that the projected divided government are driving stocks at the moment. Heaven forbid that those with extraordinary incomes greater than $1Million should have to pay ordinary income rates on their gains and dividends. Instead we should boost the Market by allowing that income bracket to only have to pay a maximum of $750. And regarding "other stock market depressing policy" (the worst one of all mind you) we should mandate ZIRP now, ZIRP tomorrow, ZIRP forever. The gridlock motto: Depress Savings and Save the Market. ;-)
P_D
  |     |   Comment #8
181 million Americans own stocks in some form. Anything that depresses the stock markets hurts all Americans, especially the middle class and poor.

And the stock market isn't just about investment, it's about jobs. Without it Americans wouldn't have jobs because corporations would not be able to finance their businesses.

As the stock market goes so goes the US economy and so goes middle class prosperity. Why would anyone want to hurt the stock market?
blazer9
  |     |   Comment #10
Corporations are legal businesses of indentured citizens.
Sort of like......
If you're indentured to your grandmother, you may have promised to feed her cat every day for a month. It implies a sense of duty that's become a burden.
P_D
  |     |   Comment #11
#10 Can you define the term "indentured citizen?" I'm not familiar with that term and it doesn't seem to make any sense in the context you use it, so I don't understand your comment.

Are you suggesting that "citizens" are indentured servants to corporations? If so your premise is clearly wrong since employment in the United States is entirely voluntary. Indenture means forced work and no one is forced to work.
Ravenclaw
  |     |   Comment #12
Out of 181 million American "stock owners" about 161 million individually have a total stock portfolio valuation that equates the purchase of an entry level Hyundai. As an example, Median 401k/IRA balance in the USA as of July 2020, is $22, 217.
P_D
  |     |   Comment #15
#12

I'm guessing your point is that average Americans have a large stake in the stock market since the $22,217 median 401k/IRA balance you cited represents 23% of the median household wealth ($97,300). That's an important chunk of the average 401k/IRA holders net worth!

So clearly all government entities making policy should do so with an eye towards maximizing the value of stocks and avoid policies that hurt the stock holdings of the average American (Not to mention increase their unemployment by hurting corporate job makers' ability to raise capital to fund their businesses through public stock offerings.).
Sherlock
  |     |   Comment #13
And the week or two before this, the explanation for the rise in the stock market was related to the polls information at the time that there would NOT be divided government thus assuring a bigger relief package injecting much needed money into the economy.

Another indicator of confidence in the upcoming economic success with a change in the administration was the HUGE amount of donations from Wall Street, finance, insurance and real estate to help make that change in administration happen.
Sherlock
  |     |   Comment #5
Some financial analysts believe said we have to separate the performance of the stocks from the challenges for some companies the past few years. For tech companies, they were unhappy with the uncertainty for tech supply chains because of the trade war with China and the restricted key work visa programs that technology firms rely on to hire skilled foreign workers. Many American corporate leaders want more predictability than this administration provided, in spite of risks of higher corporate taxes and increased regulations.
111
  |     |   Comment #14
This is possibly true for some of the large tech multinationals, but perhaps less true for midcap or small-cap companies. These firms may have a greater interest in preventing higher corporate taxes and increased regulations, since they often have less ability to move work and taxes to lower-tax venues around the world than do the multinationals.  On the employment front, midcap or small-cap companies provide far more jobs to the US than do the tech giants.

And long-term, policies that encourage the domination of key, strategic parts of supply chains by China may become problematic even for the tech multinationals, as well as a possible national security issue for the US.
milty
  |     |   Comment #16
This has nothing to do with Fed, but striving as best we can to find the truth is certainly part of a good strategy for savers, which I think we would all agree that Ken helps us do.

“There’s a certain comfort that comes from knowing a fact,” Mr. Trebek told the Times in July. “The sun is up in the sky. There’s nothing you can say that’s going to change that. You can’t say, ‘The sun’s not up there, there’s no sky.’ There is reality, and there’s nothing wrong with accepting reality. It’s when you try to distort reality, to maneuver it into accommodating your particular point of view, your particular bigotry, your particular whatever — that’s when you run into problems.”

R.I.P. Alex Trebek (11/8/2020)
#17 - This comment has been removed for violating our comment policy.
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