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.
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.