At the completion of its two-day FOMC meeting, the Fed issued a statement very similar to its March statement. The only change was in the economic overview. The April statement is a little more positive about the progress on the recovery. Also, the new statement is acknowledging a rise in inflation, but as expected, the Fed considers this a temporary situation. The following are excerpts of the two statements that show the changes:
Excerpt of the March FOMC statement:
Following a moderation in the pace of the recovery, indicators of economic activity and employment have turned up recently, although the sectors most adversely affected by the pandemic remain weak. Inflation continues to run below 2 percent.
Excerpt of the April FOMC statement:
Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened. The sectors most adversely affected by the pandemic remain weak but have shown improvement. Inflation has risen, largely reflecting transitory factors.
The Fed also removed the word “considerable” in the description of the risks to the economy that exists:
Excerpt of the March FOMC statement:
The ongoing public health crisis continues to weigh on economic activity, employment, and inflation, and poses considerable risks to the economic outlook.
Excerpt of the April FOMC statement:
The ongoing public health crisis continues to weigh on the economy, and risks to the economic outlook remain.
Everything else in the April statement was the same as the March statement. The zero interest rate policy and the asset purchases remain the same, and like March, there was no dissent. All eleven voting members of the FOMC voted for the monetary policy action in the statement.
After the FOMC statement came out, Fed Chair Jerome Powell held a press conference that included providing an opening statement and taking questions from reporters. Several reporters tried to get the Fed Chair to provide more details on when the Fed will decide to start tapering its asset purchases. They ask several questions that were basically the same. Fed Chair Powell was careful to give the same basic reply by saying that the Fed is looking for “substantial further progress” toward their goals. Fed Chair Powell’s opening statement included details on employment which provided insights on what “substantial further progress” means. Here’s an excerpt of his opening statement:
Employment rose 916,000 in March, as the leisure and hospitality sector posted a notable gain for the second consecutive month. Nonetheless, employment in this sector is still more than 3 million below its level at the onset of the pandemic. For the economy as a whole, payroll employment is 8.4 million below its pre-pandemic level. The unemployment rate remained elevated at 6 percent in March, and this figure understates the shortfall in employment, particularly as participation in the labor market remains notably below pre-pandemic levels.
Fed Chair Powell also continued to downplay the risk of high inflation. Before the Fed starts to publicly worry about inflation, it’s probably going to take several months of inflation rising to levels that haven’t been seen in decades. The Fed seems to think such a condition would be very unlikely given the unemployment condition.
In summary, the Fed showed no signs that it will be making any changes to policy for some time to come. All signs point to the Fed holding steady with its zero rate policy for the rest of 2021 and very likely through 2022.
Future FOMC Meetings
The next three FOMC meetings are scheduled for June 15-16, July 27-28, and September 21-22. The June and September meetings will include the summary of economic projections.
Potential bleak future for savers
Based on what the Fed continues to say and based on how deposit rates have fallen, I’m afraid we are in for a long period of very low deposit rates. It’s unlikely that deposit rates will receive any help from the Fed through 2023.
The best hope for savers is that a strong economic recovery pushes banks into raising deposit rates. A strong economy will give a boost to loan demand which will force banks to increase their deposits. Also, a strong economy will boost the stock market which encourages investors to move their cash out of banks and into stocks. That will also push banks to raise their deposit rates to increase deposits.
One thing that’s different from the last zero rate period is American’s savings rate. The pandemic has suppressed spending. The lower spending along with the stimulus checks have allowed many Americans to build their savings. This has resulted in record deposit levels at banks and reduced loan demand. These conditions have contributed to the record low deposit rates that we’ve seen in the last year. I’m afraid this condition may not improve much until the pandemic and the stimulus checks have completely ended.
Low deposit rates are bad enough, but if we see high inflation, savers will get punished even more. With the unprecedented fiscal stimulus, this is a risk. Due to the Fed’s new inflation framework, savers may have to live with a year or more of inflation that exceeds the Fed’s 2% inflation target. It may not be too bad if inflation is just a little above 2%. However, there could be major problems in the markets and in the economy if inflation starts to rise well above 2%. The Fed thinks it knows how to handle high inflation. Hiking rates would probably be the primary tool. However, this could cause economic turmoil and a recession. Deposit rates may rise during this time, but once the economy falls into a recession, the Fed would likely go quickly back to rate cuts.
Deposit rates during the last zero rate period (2008-2015)
As I mentioned above, this new zero rate period may be worse for savers due to how the pandemic has affected American’s savings rate. Nevertheless, it may still be useful to review this history. Once the pandemic has fully ended, conditions may start to be similar to what was seen during the last zero rate period.
Deposit rates did rise for periods of time during the last zero bound years (from Dec 2008 to Dec 2015). History suggests that we can see small deposit rate hikes even without Fed rate hikes. The 2013 Taper Tantrum was a period when the Fed started to taper its bond buying and long-dated Treasury yields had big gains. For example, the 10-year Treasury note had a yield of 1.86% when 2013 began. By the end of 2013, the 10-year yield had risen to 3.04%.
PenFed’s 5-year CD yield went from 1.15% in the summer of 2013 to 3.04% by December 2013.
CD rates at online banks took more time to rise. Both Ally and Discover’s 5-year CD yields reached a pre-2020 bottom of 1.50% in 2013. By September 2014, Ally’s 5-year CD yield had risen to 2.00% and Discover’s had risen to 2.10%.
CD rates did fall after the above highs. PenFed’s 5-year CD yield fell to 1.21% in 2014 and then again in 2016. Ally and Discover’s 5-year CD yields fell to around 1.75% in 2016 and 2017. Even after the first couple of Fed rate hikes, it took awhile before the 5-year CD rates to rise. Those early Fed rate hikes impacted the markets and the economy, resulting in lower Treasury yields.
For online savings accounts, there were some increases during the 2008-2015 zero rate years, but for the most part, rates remained below 1%. No sustained increases occurred until we were well into the Fed’s rate hiking cycle in mid 2017.
So based on the 2008-2015 zero rate history, we could see some modest increases of CD rates and a few CD specials that may offer rates a little higher than the online bank CDs. We’ll probably have to see 10-year Treasury yields well above 2% before we start to see any significant improvements in CD rates. The 10-year yield ended Wednesday at 1.63% (just 1 bp higher than it was during the March Fed meeting.)
Strategies for savers to maximize cash yield
The possibility of small CD rate increases over the next couple of years isn’t anything to get excited about, but it does suggest that we shouldn’t rush into CDs now. Keeping more cash in online savings accounts and/or high-yield reward checking accounts seems to be a better strategy than opening new CDs.
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 rate 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%.
As we have seen in the last couple of months, a few credit unions are still coming out with CD specials. Of course, those CD rates are nothing to get excited about. Nevertheless, they’re much higher than the rates you can currently get from online banks. For example, NASA FCU has been offering a 49-month CD with a 1.50% APY. That’s 3x the rate that you can get at most online savings accounts.
If you can get CDs with rates well over 1%, they still might be worth it for at least some of your savings just in case we’re headed into a very long zero rate period.
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.