Fed Projections Show Zero Rates Through 2023 - Strategies for Savers

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At the completion of its two-day FOMC meeting, the Fed announced a policy that’s inline with its new inflation strategy. In summary, the policy suggests that we won’t see a Fed rate hike for a long time, a period that's even longer than what was suggested at previous Fed meetings. The Fed also released updates to its Summary of Economic Projections (SEP) which includes federal funds rate forecasts that now extend out through 2023. Based on the FOMC statement and the SEP, it looks very unlikely that the Fed will hike rates through 2023. In fact, they suggest that the Fed may not hike rates for years after 2023.

First, here’s the important paragraph of today’s FOMC statement which includes the new inflation language that is used to describe the timeframe for how long the near-zero rates will last. I’ve highlighted the critical sections that specifically address the timeframe.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. 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. In addition, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency mortgage-backed securities at least at the current pace to sustain smooth market functioning and help foster accommodative financial conditions, thereby supporting the flow of credit to households and businesses.

Two Fed policymakers voted against today’s policy. The FOMC statement included a paragraph describing their reasons for the dissent:

Voting against the action were Robert S. Kaplan, who expects that it will be appropriate to maintain the current target range until the Committee is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals as articulated in its new policy strategy statement, but prefers that the Committee retain greater policy rate flexibility beyond that point; and Neel Kashkari, who prefers that the Committee indicate that it expects to maintain the current target range until core inflation has reached 2 percent on a sustained basis.

Neel Kashkari is known as an inflation dove, and his dissent shows that he wants forward guidance that places a higher bar for the economy to reach (core inflation reaching 2% on a sustained basis) before the first rate hike. Robert Kaplan is known as a centrist, but his dissent today appears hawkish. He seems to want more flexibility for the Fed’s decision about the first rate hike.

Summary of Economic Projections (SEP)

Today’s SEP has changed considerably from the June SEP. One change is that the SEP now includes forecasts that extend out through 2023. The June SEP only included forecasts through 2022. The bad news for savers is that the large majority of Fed policymakers are anticipating no rate hike through 2023. None of the 17 policymakers anticipate a rate hike through 2021. Only one out of the 17 policymakers anticipates one or more rate hikes in 2022, and only four of the 17 anticipate one or more rate hikes in 2023.

More bad news for savers can be construed from the PCE forecasts. The PCE is the Fed’s preferred inflation measure. The median Core PCE projections of the 17 Fed policymakers is under 2% through 2022. It only reaches 2% in 2023. If the Fed sticks to its new inflation strategy and if inflation numbers move as the Fed anticipates, it could take several years after 2023 before the inflation numbers satisfy the Fed’s criteria that allows them to hike rates.

There is some good news that can be construed from today’s SEP. The economic recovery since June has been stronger than anticipated, and that’s indicated by the upgraded forecasts in the SEP. The forecasted unemployment rates for this year and the next two years have fallen considerably from June. By the end of 2022, the unemployment rate is forecasted to be 4.6%, that’s down from 5.5% in June. The GDP for 2020 was also upgraded. It’s now forecast to be -3.7%, that’s much better than the June forecast of -6.5%. If the economic recovery continues to outperform forecasts, it’s possible that inflation will rise faster than forecast, and that will force the Fed to hike rates sooner than expected.

Future FOMC Meetings

The next three FOMC meetings are scheduled for November 4-5, December 15-16, and January 26-27. The December meeting 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

Based on what the Fed has said and based on how deposit rates have fallen, I’m afraid we are in for a long period of very low deposit rates. Signs are that this zero-bound period will be worse than the zero-bound period from 2008 to 2015. Deposit rates have fallen much faster 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%. It took only five months after the Fed started this new zero-bound period in March for Ally’s online savings account yield to reach a new low of 0.80%. And based on current savings account rates at Ally’s competitors like Marcus (0.60%), Barclays (0.60%) and PurePoint Financial (0.60%), we may soon see even lower rates.

The best hope for savers is that the economy does 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.

With at least some possibility of 2% CD specials in 2021 and 2022, locking into long-term CDs with rates near 1% doesn’t seem like a good strategy. 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
NYCDoug
  |     |   Comment #1
I thought the FED's (dual) mandate was focused on employment & inflation.
But then this phrase, toward the end of the first statement Ken excerpted for us above, caught my eye: 

                                                  " . . . to sustain smooth market functioning . . . "
Does that not irk you, too?
Or am I misinterpreting something?

So much for laissez-faire economics!
deplorable_1
  |     |   Comment #5
Yeah they may as well have said to keep the stock market inflated. Well I guess if you can't beat them join them. That's why I invested more when the DOW was at around 18,000.
Buckeyes
  |     |   Comment #6
The Fed's dual mandate is now to focus on Trump and what he had for breakfast. Oh I should point out I'm a card carrying Republican.
#16 - This comment has been removed for violating our comment policy.
111
  |     |   Comment #18
" . . . to sustain smooth market functioning . . . " It's more than arguable that the smooth functioning of "markets", in the broader sense, is essential to the functioning of this country. In 2008, the functioning of financial markets largely failed, causing sharply increased unemployment and lowered inflation, and the Fed intervened. One can disagree about the exact actions they took and the timing of those actions, without disagreeing that they should have intervened.

This year (2020) the shutdown of what one might call the "employment market" in large swaths of the economy (shelter-at-home kept many employees from working, so many companies shut down) caused an even sharper increase in unemployment, and again the Fed acted. Again, one can disagree about the exact actions they took, but does anyone think they should not have acted?

Frankly, since World War 2, there's usually been a greater benefit to the US in keeping rates relatively lower instead of higher, with the exception of the Paul Volcker period when "stagflation" (high inflation AND unemployment) justified a hawkish approach - which Volcker applied. Although some presidents have been more vociferous about it than others, except for the Volcker period how many have we ever heard complain that rates should be higher? Most have found that there is more to be gained both politically and with the economy by keeping rates lower.
deplorable_1
  |     |   Comment #19
I think the issue here is not FED intervention but the fact that they will be basically ignoring inflation going forward or at least the 2% target. So we would now need massive inflation before rates will be raised. Not really good for savers or consumers because we may be paying much higher prices on goods before the FED decides to act. We will have to wait and see how much inflation they are willing to accept.
111
  |     |   Comment #25
d1 - This could well be true, but that wasn't really my point. I was arguing that the phrase " to sustain smooth market functioning ", is well within the purview of the Fed, particularly with so many recent (and current!) examples of recessions or downturns where various "markets" (broadly defined) ceased functioning smoothly, and this directly increased unemployment sharply, and lowered inflation below the desired level. It's clear that one or both of the Fed's traditional dual mandates are often greatly impacted by a sudden loss of smooth market functioning.

Regarding savers - I've always felt that to succeed or even survive the fickleness of the economy, one needs to be part saver and part investor, and to be ready to, within limits, emphasize either one or the other of those functions based on the landscape one is presented with. I'm not sure how much has ever been gained by the majority of those who ignore the old saying "don't fight the Fed".
milty
  |     |   Comment #26
Where is the phase "to sustain smooth market functioning" defined as keep the market in perpetual growth? The market, when there is a correction due to exuberant and irrational speculation (for example, due to ZIRP), is functioning IMO as it should, and the Fed should not have interfered in 2019 by lowering rates. As to don't fight the Fed, it's counterpart is "the market is not the economy," which maybe the Fed should pay attention to as well as being the lender of last resort instead of the first.
deplorable_1
  |     |   Comment #2
Well as I have said many times before interest rates and FED policy does not occur in a vacuum and therefore things like the upcoming election and the covid-19 situation will have much more to do with the future of interest rate policy than anything else at the moment.
I wouldn't put too much weight on this FED meeting and focus more on the December 15-16 meeting after the election instead. The stock market has already recovered and the unemployment rate is already well on it's way to recovery. Toss in a bit of higher inflation and/or a vaccine and these projections may change as well.
P_D
  |     |   Comment #3
I don't think you can tell much about where interest rates are going until after the election is decided.

One candidate has a track record of consistently blowing through the most optimistic forecasts of the economic experts, the other has a track record of presiding over the slowest economic recovery in American history.

If economic growth is the only way to escape the Fed's game plan, nothing is more important to savers than the election results.
deplorable_1
  |     |   Comment #7
Right PD but if I said that.........well you know! lol
milty
  |     |   Comment #27
I hardly expect the candidate who complained about Yellen's low rates and then did an about face to campaign for higher rates. However, should the other candidate win you can bet that deficits will suddenly again matter. I predict it doesn't matter who wins, rates will stay low and most workers will not see any wage increases greater than the CPI, if that.
gregk
  |     |   Comment #4
Anyone think bondholders will cooperate with Fed passivity in the event of rising inflation? No way.
The Fed can't control interest rates in all circumstances, and bond investors aren't going to accept substantial negative real returns whatever the Fed does or doesn't do. An inflationary spiral would result in significantly higher market interest rates in very short order.
goldismoney
  |     |   Comment #33
pretty sure they can just buy all the bonds
Buckeyes
  |     |   Comment #8
is attempting to find 6-8 % yield in the market a sound strategy or is that just playing in the casino?
P_D
  |     |   Comment #9
6-8% dividend yield in the stock market?

Stocks are always riskier than insured bank deposits, but you can find yields in that range with some pretty good bets. AT&T for example has over a 7% yield right now. For the last maybe 10 years or more it's been more like a bond than a stock. The price has gone almost nowhere, but the dividends keep humming along.
Buckeyes
  |     |   Comment #11
Considering Exxon that I have owned forever and Citi's recent flop, Im just not sure if there are safe yields anymore.
P_D
  |     |   Comment #13
They'll both come back. Without trying to be flippant, that's the quintessential feature of stocks: they rise and fall. So they are only appropriate to hold if you can weather those swings.
milty
  |     |   Comment #28
PD#13: generally true, but not always--remember Enron or more recently Theranos?
Buckeyes
  |     |   Comment #20
T is well off it's 52 week high of 39 and change, trading 10 bucks lower than that today. The price HAS gone somewhere. Down into the toilet. With Powell's nonsense I do wonder what's up with the "safe" banking industry next.
Buckeyes
  |     |   Comment #21
I do agree with you though that T hasn't gone anywhere, if your time frame is 10 years. It's been remarkably blah , and awful recently.
deplorable_1
  |     |   Comment #10
Several monthly dividend paying stocks to choose from just sort from high to low and make sure they are still paying that rate after the virus hit so due diligence is required. For example I have REML which is paying me around a 25% coupon yield at my cost basis but they list it as a 66.7% yield because it is based on the trailing 12 months. For safety stick with utilities and you should be able to get those yields easily.
https://www.dividendinvestor.com/monthly-dividend-directory-2/
Buckeyes
  |     |   Comment #12
thanks deplorable, you are always a wealth of good info.
Mak
  |     |   Comment #17
Now that's funny...lol
P_D
  |     |   Comment #14
Huge difference in risk between REML and most utility stocks. Apples and oranges.
deplorable_1
  |     |   Comment #15
No doubt PD. I wasn't recommending it just using it as a prime example of how the dividend yield can be way off. This is particularly true for monthly paying dividend stocks where the monthly dividend varies month to month. Dividend.com is listing the REML yield as only 6.27% because September is a small dividend month and they just multiply by 12 to calculate yield. Next month it will show the yield as outrageously high because it is a large dividend month. The Credit Suisse website lists it as 16.5% yield but they only use the trailing quarter and the current closing price. I calculate my own yield based on my cost basis and trailing post covid dividends projected over 12 months which should be much more accurate IMO.
milty
  |     |   Comment #29
No doubt many have been compelled into the Market recently due to FOMO and TINA, and so I certainly understand this discussion on dividends. Chasing dividends may indeed make sense for certain stocks if you can find them in this Market, but these be strangely inflated times.
deplorable_1
  |     |   Comment #32
There are still some deals out there. Pembina Pipeline Corporation(PBA) is at a good price point currently $23.90 with a 8% monthly dividend yield and is also "qualified" for tax purposes. Has a long history of dividend increases as well.
milty
  |     |   Comment #35
Looks like PBA's 52wk high was $40.65, but currently $23.96. Guess those who bought at the high would not be too happy at the moment, (It's dividend yields 8% on a yearly basis, which is still very good and maybe cause for concern.) However, at my retirement age, would be worried about investing a $100K into this. And that's really what you need to do to make real money in the market. That is, buy individual stocks and lots of them, which most can't afford to do. So, instead they buy index funds where the return is much less (S&P500 2.0%), but the diversification gives peace of mind.
deplorable_1
  |     |   Comment #36
Milty it's a $40 stock selling for cheap I bought more at $14/sh. during this covid crisis. I owned PVX and PBA bought it out for a premium. It has good management for a Canadian company. This is my oldest and largest holding and has only raised the dividend for as long as I have owned it. I probably should have sold it at $40 and bought it back but hindsight is 20/20 as always.
Buckeyes
  |     |   Comment #37
i would probably stay away from more banks and energy for the time being. which usually means it's time to buy :) I've been in and out of EPD countless times, which face it, is gambling. The only stock I have held outside my IRA for years is Citi. Yah, not the best of weeks for me.
Choice
  |     |   Comment #22
Ken, what is a/the strategy of large institutional/international debt players and why their actions can precipitate a change in CD rates in US? What do you or should you track in that regard? Bottomline, why would those “players” stay in US debt products with the US rates providing no gain? I submit they can move the nterest rate needle...and their fiduciary duties implore them to get higher returns and vacate US market and send capital elsewhere, if only to tell the US not to flood the world with its debt problems! What says you?
Buckeyes
  |     |   Comment #23
That is flat out the million dollar question Choice. Or the 30 trillion dollar question. I've been meaning to ask this for weeks. My answer would be the new acronym they are throwing around. TINO. There is no alternative.
Choice
  |     |   Comment #24
Tonto.  If one looks at Japan for the last XX years, they have been flat. But the laws on being a fiduciary are different in US and a greater propensity in the US for risk, Japan would not be a good model but a mere resting/holding area. I think that that cash in US can’t all be in speculative endeavors and needs to find another safe currency with higher rates thus driving the need for savers to purchase CDs at a fair(er) rate here.
Thus, Ken what can you all track to see about funds moving?
NYCDoug
  |     |   Comment #30
Foreign CDs?
And currency (exchange rate) risk?

How might we best take advantage?
Or are these dangerous waters to enter?
deplorable_1
  |     |   Comment #34
Looked at them before not worth it due to exchange rate risk and also the foreign currency exchange fees. 1% fee in and 1% fee out and 1% is cheap they can be 2-3%. Unless you can find a work around like using a credit card with no foreign transaction fee like Capital One Quicksilver(1.5% cash back) to purchase the CD. Even then it would need to be coded as a purchase to work.
P_D
  |     |   Comment #31
"Bottomline, why would those “players” stay in US debt products with the US rates providing no gain? I submit they can move the nterest rate needle...and their fiduciary duties implore them to get higher returns and vacate US market and send capital elsewhere, if only to tell the US not to flood the world with its debt problems!"

That's an easy one. The reason there is a flight to US dollars, regardless of the return is the same that it has consistently been for more than a century: because the US Dollar is backed by the strongest economic system in the world and most likely to retain its value in a global crisis such as the one we are in now.

Investment returns are relative. A zero return beats a negative return after a loss of principle every time. Anyone in a fiduciary capacity who isn't on top of this concept is in the wrong job.
buckeye61
  |     |   Comment #38
I'm astonished that the FED would make such long-range projections about both inflation and the funds rate. With all of their obsession about the inflation rate, I think they are hiding their real strategy for keeping rates at zero: the Federal deficit. The massive Federal debt has become extremely expensive to service and historically low bond rates are the only solution.
Choice
  |     |   Comment #39
Really? Their projections for out years are along a similar thread running its course in the DC area! Must be contiguous.  How much sanity does anyone believe...why believe the Fed?  Merely b/c ...is getting what they currently want!  2021 will bring a fresh look no matter what!
Buckeyes
  |     |   Comment #40
considering our truly massive federal debt, I am astonished we don't have runaway inflation, although I don't think that it is completely off the table. my state, New York, is going to get pulverized when new budgets start coming out for state, county, village, town and school. And New York City is a bloody mess. Eventually the federal debt has to catch up to us, doesn't it? If only NY could print money. What a sad solution that would be.
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