Fed Projections Show Zero Rates Through 2022 - Strategies for Savers
As expected, the Fed didn’t announce any policy changes at the end of its two-day meeting. Today’s FOMC statement included the same paragraph from April’s statement which describes the Fed’s intention to maintain the near-zero target rate “until it is confident that the economy has weathered recent events.”
The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. In light of these developments, the Committee decided to maintain the target range for the federal funds rate at 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.
The Fed also announced that it plans to keep buying Treasurys and mortgage-backed securities “at least at the current pace.” This continues the commitment of “unlimited QE” that the Fed first announced at its March 15th emergency meeting.
The Fed has been successful in keeping the markets running, and it did note this in the statement which is a change from the April statement:
Financial conditions have improved, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.
No one dissented at today’s meeting.
Summary of Economic Projections
The first updates since December to the Summary of Economic Projections (SEP) were released today. The changes from December were massive. The most interesting projections for savers is the dot plot that lists FOMC member projections of the target federal funds rate. The projections are disturbing. None of the 17 FOMC members forecast any increase for 2020 and 2021. Only two of the 17 forecast an increase in 2022. This is a clear sign that the Fed is prepared to maintain its zero interest rate policy (ZIRP) for multiple years.
The Fed’s SEP in December proved to be way too optimistic. Of course, that’s the result of the pandemic, but it’s possible that the Fed is way too pessimistic now. If the economic recovery proves to be much stronger than expected, it’s possible that the Fed won’t keep rates near zero for multiple years.
A strong economic recovery will require that the unemployment rate to return close to its pre-pandemic levels. Based on the SEP, the Fed doesn’t see that happening through 2022. Fed members are forecasting an unemployment rate of 9.3% by the end of this year. The expectations are for this to fall slowly in future years. The Fed’s forecasts are for the rate to fall to 6.5% by the end of 2021 and to 5.5% by the end of 2022. In December, the Fed had forecasted this rate to be in a range of 3.5% to 3.7% through 2022.
In addition to low unemployment rates, inflation will have to be near or above the Fed’s target rate of 2% before the Fed will consider rate hikes. Based on the SEP, the Fed doesn’t see that happening through 2022. Fed members are forecasting a Core PCE inflation rate of 1.0% by the end of this year. The Fed’s forecasts are for this rate to slowly increase to 1.5% by the end of 2021 and to 1.7% by the end of 2022. In December, the Fed had forecasted this rate to be in a range of 1.9% to 2.0% through 2022.
Today’s news on the May CPI inflation points to a long period before inflation numbers get back on track. The inflation measures published this morning aren’t the Fed’s preferred inflation measure (PCE), but today’s CPI numbers do show that we are still in a deflation period. This was the first time that the core CPI has declined for three consecutive months.
Press Conference
The Fed Chair Jerome Powell’s press conference today mostly reinforced the message from the statement and from the SEP. For savers, the Fed Chair made it clear that we shouldn’t expect rate hikes for a long time:
We’re not thinking about raising rates. We’re not even thinking about thinking about raising rates.
The Fed Chair also reinforced how massive a shock to the economy the COVID-19 pandemic has been:
This is the biggest economic shock in the U.S. and in the world really in living memory. We went from the lowest level of unemployment in 50 years to the highest level in close to 90 years, and we did it in two months. Extraordinary.
The only positive thing to note for savers is that the Fed Chair gave no signs that the Fed is considering negative rates. The Fed Chair did say that there are discussions regarding Yield Curve Control (YCC), but its effectiveness “remains an open question.” By using the YCC policy tool, the Fed would target certain long-term interest rates through the buying and selling of Treasury notes and bonds. If the Fed implements YCC, it would likely result in a longer period of ZIRP.
Future FOMC Meetings
The next three FOMC meetings are scheduled for July 28-29, September 15-16, and November 4-5. The September 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 ZIRP period will be worse than the ZIRP period from 2008 to 2015. Deposit rates have fallen much faster this time. For example, it took about 20 months after the Fed started ZIRP in December 2008 before Ally Bank’s online savings account yield fell to 1.25%. It took less than two months for this to occur this time. It took more than four years for Ally Bank’s 5-year CD yield to fall to 1.50% after the start of the 2008 ZIRP. This time, Ally Bank’s 5-year CD yield fell to 1.50% just over two months after the start of ZIRP, and the 5-year CD yield continues to fall. It’s currently at 1.35%, an all-time low for the Ally Bank 5-year CD.
During the ZIRP period from 2008 to 2015, online savings account rates remained in a range of 0.70% to 1.00%. I have a feeling that we may see a lower range this time.
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 ZIRP, 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%. If we do see a strong economic recovery, we may see an occasional 3% CD again even if the Fed keeps rates at near zero.
With at least some possibility of 3% 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 3% CDs in 2021, it’ll be better to keep cash in online savings accounts and no-penalty CDs. Then you’ll be able to jump on those CD specials when they appear.
Another option is to keep more cash in high-yield reward checking accounts. There are still several reward checking accounts with yields of at least 3%. 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 ZIRP 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 the possibility of rising rates, choose long-term CDs with early withdrawal penalties of no more than six months of interest.
Another option for your CD ladder is a ladder of short-term CDs, such as those with 1-year terms. Since many 5-year CDs have equal or lower yields than 1-year CDs, the 5-year CD ladders don’t offer much advantage. Of course, 1-year CD ladders don’t offer the rate lock which may be beneficial if rates keep falling.
The economy is down now not because of an economic collapse, it is down because it has been ordered to close during a pandemic. It has not come back yet because businesses have not been allowed to reopen fully yet, some have been allowed to open but only in a pretty limited sense, and we don't even have a measure of their opening yet, it just happened. Before you start making plans to cut everyone's throat, perhaps you could wait a couple months to see how the economy comes back when businesses are allowed to reopen significantly more or even fully.
These kind of forecasts have a way of making their own reality. If the Fed is telling businesses their business is going to be bad, those businsses are NOT going to reopen fully, they are NOT going to invest, they are NOT going to do what the Fed wants, no matter the interest rate. And consumers, too, will cut back in the face of such predictions.
Frankly, it is time to abandon the idea of putting your savings in bank and credit union accounts. It is a losing proposition. We might as well stuff it undercut a matress. I wish savers could organize a nationwide boycott of banks and CUs until a reasonable rate of return on our investment in a bank account were recognized as necesaary. They are going after OUR money only because we don't do anything to stop them. (And then the banks hit us with a lot of fees too! Its flat out abusive to us). They have to be shown we can completely collapse the econmy if we, too, don't get a decent return.
2. You make the assumption that banks are the only place that savers can invest. But that’s clearly a flawed assumption. Just because a policy might be detrimental to the interests of bank savers, doesn’t mean it is detrimental to savers. Low interest rates, whether intended to or not, favor certain types of investments. You have an opportunity to benefit from that. Ensuring bank savings rates are high is not part of the Fed’s obligations, nor should it be because that would complicate and suboptimize achievement of its main mission. Don’t fight the Fed!
I have a couple of CD's renewing this year. Considering the current environment I am looking into mutual funds instead of renewing the CD's. I can get 2.6%+ at a fairly safe mutual fund consisting mostly of investment grade gov. bonds compared to CD's which are paying 1.3% and dropping fast.
I was with you right up until the last sentence. Higher levels of equity value (or other investment instruments) don't necessarily equal a bubble. "Bubble" means overvalued, not simply a higher level. I think a lot of people make the mistake of assuming that if the value of equities has advanced over some period of time, that automatically means there is a bubble. If that was true, stocks would never increase in value because the bubble would always pop and they would go back down. Whether or not there is a bubble depends on whether investors believe the values have a rational basis, not on how high they are or even how fast they advanced. Low interest rates do not necessarily create artificial bubbles in equity markets. Sometimes they create lasting value that supports higher long run equity prices.
am still waiting for the Fed to announce they will guarantee for the next 160 days everyone's principal if they buy stocks now
don't hold your breath.
Seriously though, you are thinking of the 1980s for the 16% C.D.
Ally no longer suffers from this encumbrance and has no reason to offer loss leaders.
It happened before. Good luck to all disciplines
Just think there are sites already like the above and the various speculation sites that are widely known. Wouldn't think that another Till in the ground would produce new thinking here without bias.
For dp1
And I think it gets even better than that. As I used to put it, a penny saved is two pennies earned. It applies to most things that you save money on that are not tax deductible.
You would have to earn more than $100 to equal the savings power of spending $100 less because when you earn the money you have to pay income taxes on it. So every dollar you save is worth more than one dollar earned (assuming the money saved was not tax deductible).
For people in the highest marginal tax brackets that means a penny saved is worth more than two pennies earned. That's a whopping 100% advantage to saving more over earning more. For most people it's not worth 100% more to save rather than earn, but for anyone who pays income taxes it is always worth more to save than to earn.
As to whether or not this topic is appropriate. I understand the idea of focusing on deposit accounts in order not to dilute the information presented. But these are unusual times. How about a Covid/rioting suspension or at least relaxing of those rules to serve the DA readers? I think a topic like this, for example is probably useful to most DA readers. And if there aren't some creative ideas posted, there may not be many readers left at some point who can survive these crises. So I think it's not only in the best interest of the readers but of DA to let participants share creative ideas like this to help them through these trying times.
Excellent, now I know the secret to getting more bargains in the stock market, start the bullish "chirping" :D
Looks like some of those recently minted Robinhood traders are getting a nice education.
Yeah I know Its allowed here. Can you stay on your side of the fence>
As I've noted, my CD ladder (both IRA and after-tax) give me an "anchor-to-windward" with respect to the harsh winds of market volatility. I've yet to drag my anchor.
If you don’t offset that loss with something else that increases in value more than the inflation rate in order to offset the sure losses in your bank deposits, you are suffering a loss of the only thing that matters when it comes to money i.e. its buying power.
I can’t speak for others, but I think some people here have misinterpreted some of the things I have suggested regarding putting some of your assets into the stock market. And I think some of the negativity seems to come from those who seem gleeful when stocks have a bad day probably because they have missed so many good opportunities to invest in the stock market that seeing it have a bad time helps them assuage their regret.
In my case, of course I would rather see the stock market have a good day than a bad one. But I hardly pay any attention to it either way. In the scheme of a longer term, the ups and downs are meaningless. A day like today is a yawn to me. If the stock market fell by 50% from were it is today, dollar for dollar, I still would have made a better return on my stocks over the decades I have been in the stock market than on my bank deposits. And that’s the point. The stock market is a long term winner, not a good place for short term speculation for most people.
In the kind of environment we are likely to be in the bank deposit market for the next year or two, you are going to lose buying power if you don’t take some risk elsewhere. You can make a rational decision to take a sure loss in order to avoid taking any other risk, or you can make a rational decision to try to offset some of that sure loss on your bank deposits by taking prudent risks. I choose the latter.
Well, it's really a matter of perspective and where on the curve you came in. While it took 25 years to get back to where stocks were just before the Great depression, it only took a few years (less than 5 after the crash) to get back to where it was before the bull run that ended In the depression and about a decade for it to reach where stocks were just a year and a half before the depression.
Put another way, generally speaking, If you bought in 1922 and held in 1929, you were back to where you were when you started by 1933 and it was all upside after that. If you bought at the peak in 1929, well you had decades of misery waiting for your stocks to climb out of the hole the crash put your portfolio in. On the other hand if you didn't buy until the bottom hit in 1932, you were doing fantastic throughout the rest of the depression and beyond. (Even if you waited a year after that 1932 bottom before "buying the dip" your stocks would have been doing very well for the rest of those "about 25" years).
Specifically -
“- It took the DOW 25 years to regain its 1929 highs in nominal terms [only looking at share price].
- Including dividends, which reached a high of 14% at the depths of the crash (when the market was down almost 90%), it took about 10 years for 1929 DOW investors to get their money back.
- Including deflation, dividends, and a broader market measure than the DOW (according to Hulbert), it took 5 years.”
https://www.businessinsider.com/henry-blodget-new-study-stocks-only-took-5-years-to-recover-after-1929-2009-4
Should dividends be included in the story? Of course - it's an apples-to-oranges comparison if they're not.
So, ole Jerome has at least $50M or maybe double that, but in either case he's the wealthiest-to-date to lead the Fed. Notwithstanding his thinking or lack thereof, he did raise rates . . . so, like it or not we need to go back to the future.
Even with NACU insurance at $1M, are you saying you wouldn’t go above the $250K limit?
If you are the sole owner of the accounts with three beneficiaries, I do not know that you have a total of $1,000,000 of NCUA deposit insurance coverage. I suggest you take a look at the NCUA Share Insurance Estimator at https://www.mycreditunion.gov/share-insurance-estimator-home
He has multiple accounts; try the following scenario:
account 1 - Just Him (single) - 250k insured
account 2 - Him with beneficiary 1 (POD/ITF) - 250k insured
account 3 - Him with beneficiary 2 (POD/ITF) - 250k insured
account 4 - Him with beneficiary 3 (POD/ITF) - 250k insured
total 1 million insurance according to your own link.
IE 300k, 100k, 100k , 100k is only 600K, which is less than 1 million but 50K is uninsured because it's sitting in an account that has exceeded the 250k limit.
Last year, unthinkingly, I used inherited funds to fill this CD to $250k. I now have over $8k (soon to be $9k) in interest [what GTE calls "dividends"] posted to my account, and compounding.
Is there a way -- without "breaking" the CD (and ideally without incurring major fees) -- to trim it back down to $250k (or less) in order to circumvent loss of significant interest, should GTE go under?
Or would it be possible to designate beneficiaries -- or a joint owner -- ex-post-facto, in order to boost coverage? (Assuming the same basic FDIC rules apply to NCUA deposit insurance) . . .
https://www.businessinsider.com/us-retail-sales-may-record-double-estimates-economy-vshaped-recovery...
Of course people will be buying, just as they did in May. The only reason they stopped was stores were not open to buy from. Many continued to work, the others got unemployment plus $600, that bonus leaving many who worked at lower income levels getting 100% of their paycheck, and most others getting nearly all of it. And lots of other money pouring out to the economy and to individuals. They are not shorted, they have the money to spend, all they need is a place to open so they can spend it. The economy is not dead, it is merely taking a nap — unless actions are taken that do undermine it. The Fed’s announcement will only dampen the economy, not help it.
I think the Fed announcing that at least the next two years will be so terrible we can’t even think of raising rates was a VERY bad move and a very bad outlook of the Fed members, and it is NOT how Fed communications have been in the past. They should not have specified two years! They should have said something more vague, such as “for the foreseeable future,” which people can interpret as they want but could be as short as simply through the end of this year. Powell blew it, that Fed statement, and the Fed’s outlook, was very unprofessional.
And being as the overwhelming majority of the US economy is pumped by retail sales, today’s report very promising for a fairly quick recovery, not two years of a dead recovery.
As I said in my OP, the Fed announcement was without the measures needed to draw such a conclusion. You can’t see how the economy is doing if it is completely shut down. Now we have May information, it was amazing even as the Fed announced it was dead, and it was amazing even with the economy only starting to open some, not yet anywhere near fully open!
The end is not near, as the Fed would seem to think. And it should not have announced an outlook that for all intents and purposes said it is. That announcement was no better than strictly amateur, far below the standards we expect of the Fed.