Fed Meeting: Second Straight 75-bp Rate Hike - Strategies for Savers


At the conclusion of the FOMC meeting, the Fed announced its second straight 75-bp rate hike. The target federal funds rate is now 2.25%-2.50%, which is the target range that had existed at the peak of the last rate hiking cycle in December 2018. It took three years of rate hikes from 2015 to 2018 to equal the rate hikes from the last four and a half months. Below are excerpts from today’s FOMC policy statement that covers the rate decision:

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 2-1/4 to 2-1/2 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective.

For the full details, please refer to today’s FOMC Statement.

The post meeting press conference provided some additional details about the Fed’s plans on future rate hikes. In prepared remarks, Fed Chair Powell described what it will take for the Fed to transition to smaller rate hikes:

Over coming months, we will be looking for compelling evidence that inflation is moving down, consistent with inflation returning to 2 percent. We anticipate that ongoing increases in the target range for the federal funds rate will be appropriate; the pace of those increases will continue to depend on the incoming data and the evolving outlook for the economy.

There remains a question about how serious the Fed is about bringing inflation down. If we enter into a bad recession, the Fed will be under pressure to cut rates even if inflation is still above its target. However, Fed Chair Powell has stressed several times that bringing down inflation is the Fed’s highest priority:

We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses.

If the Fed is serious about bringing down inflation, the first rate cut should come several months after the last rate hike. If inflation doesn’t decline during this period, the Fed will probably extend the pause period.

Future FOMC Meetings

The next three FOMC meetings are scheduled for September 20-21, November 1-2 and December 13-14. The September and December meetings will include the Summary of Economic Projections.

Treasury Yield Changes

Treasury yields of all durations except for the 30-year declined today, suggesting that the market viewed the Fed’s meeting as dovish. From the last Fed meeting, short-dated Treasury yields increased substantially while long-dated yields declined. The Fed’s rate hikes are pushing up the short-dated Treasury yields while long-dated Treasury yields have fallen as recession worries grow.

The following yields are from the Daily Treasury Par Yield Curve Rates from the Treasury website.

  • June 15 (last mtg) → July 26 → July 27
  • 1-mo: 1.21% → 2.17% → 2.14%
  • 3-mo: 1.74% → 2.55% → 2.44%
  • 6-mo: 2.32% → 3.01% → 2.93%
  • 1-yr: 2.93% → 3.06% → 3.00%
  • 2-yr: 3.20% → 3.02% → 2.96%
  • 5-yr: 3.38% → 2.89% → 2.82%
  • 10y: 3.33% → 2.81% → 2.78%
  • 30y: 3.39% → 3.03% → 3.03%

Future Deposit Rates

Online savings account rates have generally lagged the Fed rate hikes. It may take a while before the major online savings account rates reach the levels seen in early 2019 (the last time the fed funds rate was at 2.25%-2.50%). In early 2019, the average online savings account yield reached a high of 2.23%. The online savings account yields at Ally, Synchrony, Marcus and Discover reached 2.20%, 2.25%, 2.25% and 2.10%, respectively. With more Fed rate hikes likely for the rest of this year, it would seem likely that online savings account rates will soon reach and surpass those levels.

The path of CD rates is more uncertain. With recession worries growing and Treasury note yields falling, long-term CD rates may peak sooner than we would like to see. We are now seeing an inverted yield curve with short-dated Treasury yields higher than long-dated yields. A similar condition may occur with online CD and savings account rates. CD rates will likely not have a big advantage over online savings account rates. That will be a time when it feels wrong to lock into a long-term CD that has a yield similar to a liquid savings account. Those who realize that the savings account rates can fall quickly won’t dismiss CDs.

The 2022 rise of rates can be seen in the charts of the average online savings account rates and the average online 1-year and 5-year CD rates.

Rates will eventually peak and then start falling. The larger the economic downturn, the faster rates will fall. Treasury yield declines have been the first indication of falling rates. Banks and credit unions have typically been slower to react.

Strategies for Savers to Maximize Cash Yield

It’s hard to find CDs appealing when rates are rising fast. As I mentioned above, rates will eventually peak and then start falling. We should first see this decline in Treasury yields. That can give savvy savers time to lock into long-term CDs at relatively high rates. This condition occurred in 2019 before the first Fed rate cut and in 2020 before the emergency Fed rate cuts in March 2020.

Of course, you never can be sure if rates have peaked. To ease concerns, look for CDs with mild early withdrawal penalties (EWP). For long-term CDs, a mild EWP would be six months or less of interest. If rates do go higher, a mild EWP will make it less costly to close the CD and move the funds into an account with a higher rate.

If you’re going to wait for rates to peak, liquidity will be important so that you can quickly fund a CD before rates fall. Online savings accounts, money market accounts and checking accounts with the highest rates would be best. You can sometimes get an additional boost in yields with little loss of liquidity by using no-penalty CDs. If you do use no-penalty CDs, just be sure to monitor the rates. If savings account rates rise above the no-penalty CD rate or if higher no-penalty CD rates become available, you should close the no-penalty CD and move that money.

Treasury bills and brokered CDs are now good alternatives to short-term direct CDs. Longer-term direct CD yields have caught up to yields of Treasury notes and long-term brokered CDs. Treasury bills and notes have some tax advantages and they can be easier to manage, especially in IRAs. The downside is an uncertain cost if you want to access the funds before maturity. Unlike direct CDs, there’s no fixed early withdrawal penalty.

Series I Savings Bonds

High inflation from September 2021 through March 2022 has resulted in a record-high I Bond inflation rate of 9.62%. Unfortunately, the I Bond fixed rate remains at 0%, so the composite rate equals the inflation rate. I Bonds that are purchased through October 2022 will earn an annualized yield of 9.62% for six months. The rate for the next six months will depend on inflation from March through September 2022. In mid-October 2022, we’ll be able to calculate the next I Bond inflation rate. There’s a chance that the I Bond fixed rate that will be announced in November will be positive for the first time since 2019. So you may want to wait until November to purchase I Bonds for 2022. With high inflation continuing, the I Bond inflation rate that will be announced in November should be high.

The main issue with I Bonds is that you’re limited to just $10k per year per SSN (plus $5k with your federal tax refund). I have more details on I Bonds in this post. There are ways to buy more I Bonds. This article at The Finance Buff describes how a married couple can buy up to $65k in I Bonds each calendar year via trust and business accounts.

Combination of All of the Above

It’s wise to remember that no one can accurately 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. If you are concerned with rates rising very fast in the next year, keep more in online savings accounts after you have maxed out what you can contribute to I Bonds.

For your safe money (with no risk to principal), a combination of I Bonds, online savings accounts and CDs can still make sense.

  |     |   Comment #1
And, what is (or will) DAs (be) doing in this dynamic environment? More postings? More... Less "rates under review?"
  |     |   Comment #7
From what I've seen empirically, these "rates under review" notices seem to appear more often when FIs do change their rates than when they don't. Since rates often change more often in a dynamic environment, one might expect more such notices than usual.
  |     |   Comment #2
Hope they keep raising rates. I remember World Savings used to pay like 6-7% in the 1990's. There was 8-9% mortgage rates and jobs were plentiful and there was no recession. Housing was cheap throughout the decade. Rather have that than 2% mortgages and $3500 dollar rents.
  |     |   Comment #3
5 or 6% was the norm back then in a savings account. These ridiculously low rates still don't feel right to me. It all started when the national debt went haywire in the late 90s. No way the government can service these insane debt levels at anything much higher than 0% without catastrophic inflation so they cannot let rates rise that high again.  It's actually quite scary.

China is melting down because of their enormous debt to GDP ratio.  They are having a serious crisis.  People can't get their money out of the banks and they have tanks on the streets to keep people away.  Major financial institutions are defaulting.  It could have global repercussions. 

There is a limit to how much debt is serviceable, and when you pass that limit there is no going back.
  |     |   Comment #4
Let's hope CD rates increase! 
  |     |   Comment #12
"Let's hope CD rates increase! "

I think there are some troubling signs in that regard. As of this writing both 5 and 10 year treasuries are down a half a percent or more from one month ago. And all of the treasury terms are below 3.00%.
  |     |   Comment #11
PD: The Libertarian Party is the one party for whom eliminating the Federal Debt is an essential part of their mission. If they ever choose a Presidential candidate who actually has experience and gravitas (instead of psychology professors, and Vermin Supreme's assistant)--as well as Libertarian values--they might give the major parties a run for their money. I hope that our executive and legislative branches will in future administrations treat the Federal debt as an "A" priority for a change.
  |     |   Comment #14
"The Libertarian Party is the one party for whom eliminating the Federal Debt is an essential part of their mission."

As a "conservatarian" (a term which has strong libertarian flavor notes) I can see the sentiment around that. But I think it's a bit of a lofty goal for the foreseeable future and I don't think it will ever happen as long as entitlement programs continue -- which is likely until the end of the universe plus eternity plus a billion years or so.

In the interim, I'd be happy just to see the national debt stop being treated like it makes no difference and expanded out of control. We are flirting with disaster. Sure, you can service this massive debt when the economy is strong. But what happens when the economy is thrown into recession or worse, like it was just officially confirmed it has been. Who pays for it then?

What is happening in China is very instructive. After 40 years of annual GDP growth roughly in the 7-11% range they got complacent about debt. Now, suddenly their growth is taking a big hit and they are stuck with all that debt. Their small and medium size banks are in big trouble and their 4 giant banks are not far behind. They are in debt up to their eyeballs and the music stopped when consumers (especially in their real estate sector) stopped buying and taking out mortgages.

It's not all that far fetched to predict that something similar might be in the making here if we don't stop with the debt spending. Unfortunately the news today is not good in that regard either. A mess is brewing. I'll leave it at that.
  |     |   Comment #15
PD: Excellent and helpful analysis--thank you.
  |     |   Comment #16
One thing to note about economic figures from China is to always assume they are worse than officially reported because they lie about everything for propaganda purposes. That said, they are in some serious trouble. Government corruption is also playing a big role in that.
  |     |   Comment #17
PD: A logistical question: It seems foolish from an economic decision making perspective for the Fed to have made this month's interest rate decision before today's GDP report. Could they not have rescheduled their meeting to occur after the GDP report so that they would have had fuller information at hand? It seems to me that making interest rate decisions without knowing whether GDP is expanding or contracting is more likely to lead to stagflation. What are your thoughts (or what do others think) about this?
  |     |   Comment #18
I think it's a safe bet that the Fed had that number well before it was publicly released.
  |     |   Comment #22
PD: That certainly makes sense to me. Some "chief economist" from some organization assumed they wouldn't have the data, which is why I wondered.
  |     |   Comment #19
No debt?  Balanced budget?  Won't happen...ever since we went off the gold standard except if the international community refuses to use the $ as a benchmark
  |     |   Comment #5
Posted this in other blog, which has been quite busy politically, so will add here:
I don't know what all the Treasury bond rates were back in 2008 (average 10-year treasury yield was 3.66% in 2008 and 3.26% in 2009), but the Fed had lowered its rate to 2.00% on 04/2008. On 07/2008, I got a 42 month CD from my penurious local CU at 4.25%. On 12/2008, the Fed went ZIRP. So, at 2.25%-2.50%, for some reason the bond investors expect the Fed to reverse asap. In fact, appear to be demanding it. Would one expect if say the Fed were to continue raising rates to 4.0% or higher that bonds (and CDs) in the meantime would continue downward? Is this historically what one would expect? (From what I have seen historically, it does not look like we should expect higher Fed rates to result in lower Treasury rates. Is it national debt related, or driven by our Ponzi Market, or 401Ks, or . . . ?)
  |     |   Comment #6
milty -- You may wish to take a look at an article published by the Federal Reserve Bank of St. Louis in 2017, "How Might Increases in the Fed Funds Rate Impact Other Interest Rates?"

I'm too lazy to provide additional citations, but the article's conclusions are in line with the literature in the field -- nothing new or surprising in the article as to the effect of Fed rate hikes.
  |     |   Comment #13
Nope and nope.
Before ZIRP and QE (the new normal), when the FED raised interest rates bond prices would fall.
After all, those old bonds are worth less than new ones with a higher interest rate, so why wouldn't they?
Historically, when there's "unexpected inflation", bond values go down because it wasn't "baked into" projections.
That's what happened when the "peak inflation" wasn't so peaky a couple of month ago.
The bond market went absolutely nuts and the prices dropped precipitiously during the course of a single month.
With the FED's surprise announcement of the first 0.75% hike, things calmed down.
And, the bond prices gave back half of the bond losses over a period of weeks.
Then we got the 9% inflation report and the bond market didn't even blink.
THAT I don't understand at all.
THAT should have been proof that inflation was totally out of control and killed both the stock and bond market.
THAT didn't happen.
So, my conclusion is that the markets are now "half-baked" because ZIRP and QE are the new norm.
The markets expect that despite what the FED is doing now, it's going to revert to providing the "cool aid".
Until it dawns on the "all knowing" market that maybe that's not the case anymore, market behavior is aberrant.
How else do you describe the stock market rallying after the FED raises interest rates 1.50% in a two month period?
That ain't normal!
  |     |   Comment #20
Well First we agree again. What is going on in the stock and bond market is definitely NOT in any way normal and I would not expect this trend to continue. However the longer it takes for the market to crash the better odds we have of getting better CD and savings yields in the meantime. The FED won't be so reluctant to keep hiking rates if the markets are stable.
  |     |   Comment #23
The CPI is backward looking and markets are forward looking. Energy and commodities are a big part of the inflation number and In the last month oil and gasoline have dropped 20%...also commodities have been dropping. Some of the food markets that I follow haven't dropped yet but they look like they are starting to. Now I can't predict what prices are going to do down the road a little but for right now they are dropping, oil is sitting on support right now so it could move back up, I'm not sure though.
Also the fed has only let $15 billion of their bond portfolio runoff since June 1st so they are still sitting on the bond market, new chart on their balance sheet should come out tomorrow.
  |     |   Comment #29
Well Mak the XLE reversed up this week off the Weekly 50 EMA support area and is up nearly 10% as of this post time. Bullish until proven otherwise. Oil also hit the 50 EMA and reversed decently higher. I suspect the IBond reset in November is going to be yet another strong print given we’re now halfway through the cycle.
  |     |   Comment #48
Robb, I don't watch XLE, I was talking about ticker symbol ... /CL
Today bounced off the lower Bollinger band.
  |     |   Comment #8
If depositors are more than willing to provide FI's with cheap funds for a substantially negative real return (as many posters here seem to be doing now) then why on earth would they raise CD rates much higher, regardless of how much the FED might be hiking?
  |     |   Comment #9
The answer to that question may be found in how fast and far inflation drops in the next few months, considering that both the Fed hikes and the economic slowdown (whether one calls it recession or not), are "working" to try to make that happen.
  |     |   Comment #10
The answer…no need for a FI to raise rates unless they need funds. If no need, no increase in rates. Again, unless it has a mindset of fiduciary duty to members like hose that distribute year end bonuses to members.  But that is the rub…do it for current members and/or new money only!  Straight forward as Sherlock use to say
  |     |   Comment #21
Yes gregk I agree if depositors were to ban together and refuse to lock up CD's unless rates were 4% or better then rates would go to 4% pretty darn quick. The problem is that most savers will panic and lock in low rates now thus giving the banks no incentive to raise rates higher since they won't need the funds. So it becomes a self fulfilling prophesy. I for one have not locked up anything yet since I still have add-on CD's which beat current rates for a shorter term but as usual I'm the odd man out holding out for higher yields. I did the same thing last time around and had to scramble a bit to lock up some add-on CD's just before rates went south but this strategy ended up working out very good.
  |     |   Comment #30
I, too, have not put new money into CDs, especially since liquid accounts have been steadily rising.
  |     |   Comment #24
The 10 year bottom has fallen out since it peaked at what 3.45 and CD's clearly have peaked for now. Why would they raise long term CD rates much higher? You would need a strong rally to get back to what for now has been the peak in the 10 year...I locked 1/3 of my funds because I do not trust the Fed or the Biden Admin's hostile and dumb economics. 4% CD's for may be a fantasy...
  |     |   Comment #26
Well yes the yields appear to have peaked for now but what happens if the FED decides to do another .75% hike in order to get long term rates to pay attention? Is this a possibility? Yes I think so. Also I may be able to get 3.5% in GM right notes after another FED hike which is basically the current 5 year CD rate on liquid cash. Then buying short term CD's with a 2% cash back card yields 4% tax free yield minimum although limited to credit lines and funding caps. So I'm still holding out for 4% or better on CD's and not really losing much interest in the meantime since I have add-on CD's also earning 3.5-3.75%. In 20 months when all my CD's mature if no 4% or better CD's are available I may need to lock up at 3.5-3.75% again or buy some rate insurance with a add-on CD if one appears with a good enough rate.
  |     |   Comment #27
Hi deplorable is it possible the banks and credit unions are full of cash and they just don't need the money since things are slowing down in the economy there is less demand for money ever thing is slowing down just a thought .
  |     |   Comment #31
We clearly see banks and credit unions raising rates every week, more so it seems on liquid accounts vs CDs. So, I think they are chasing depositor money, but are being frugal, trying to see how much they can bring at the lowest possible rate and yet remain competitive. I don't think that argument that the loan-to-deposit ratio is acting as a break for many FIs.
  |     |   Comment #34
the 7 day SEC yield on the Vanguard Federal Money Market Fund reached 1.84% by month's end. the 1 month Treasury went to 2.17% at auction in July. most bank/CU savings account yields should be at least somewhere between those values.
  |     |   Comment #40
I moved my savings to VG Money MKt too. Fed Repurchase agreements represent 2/3 of holdings in this fund. Looking at the repurchase agreement contract rates on FRED, they seem to have flattened in the 2.2% to 2.3% range which would likely be the short term cap on most money market rates until another Fed move
  |     |   Comment #37
I'm inclined to agree with you Milty. Banks seem to be more willing to raise rates on liquid cash rather than CD's in this environment. Probably because they can quickly cut liquid rates if they need to but CD rates are locked.
Their strategy seems to be to raise CD rates ever so slightly just enough to get skittish savers to lock up the lowest possible rates long term. This way they have locked in cheap funding to make higher interest loans as rates rise for mortgages, personal loans and credit cards.
As usual I'll go against the grain and hold out for 4% or better. Not much to lose in waiting GM Right Notes just hit 2.53% APY. I have several capped 5-6% savings accounts. Add-on CD's from 3-3.75% APY and 4% min capped CD's bought with a 2% cash back credit card. Throw in a few bank bonuses and I'm averaging around 3.5% overall anyway. 4% or bust! lol
  |     |   Comment #41
The “real” Q is why are all/most FIs not raising long term CD rates? Yet loan rates are going up! What has the Fed said in private memos to FIs on caps on long term savings rates?  In your leisure read Supremes 1997 decision in State Oil Co. v. Khan and the results of that holding on setting of maximum price controls (the Supremes had previously ruled on allowing minimum price controls)…applicable here?
  |     |   Comment #38
I have 25% of my CD funds coming up in November, 7.5% in September and I may drop 20k into I bonds for myself and the wifey, I hope for 4% but hedging my bets with locking a nice chunk 0f 25% at 3.55% for 5 years. I may be premature when the Fed goes .50 or .75 but...it makes the 1.45% I locked in in April as a CD newbie/rookie mistake, like Christmas time. I left money on the table with that move clearly. Ouch..
  |     |   Comment #39
At 1.45% why not just suffer the EWP and re-deploy those funds elsewhere now?  A 3.55% 5 year CD will recoup your small loss rather quickly, and earn much, much, more going forward.
  |     |   Comment #43
It is a brokered CD so I will have loss of principal and interest when I sell on the secondary market...it comes up in April 2023 so I am inclined to suffer the bad decision and hope rates on 3,4,5 year CD's have stayed competitive and are nearing the 4% or greater we all hope for. On Fidelity it shows an around $2500 loss. It may still be worthwhile and I will check out the calculator (was it on DA) that analyzes breaking CD's
  |     |   Comment #44
Have you seen the ability to get 3 month CDs anywhere with credit cards? Does that exist?
  |     |   Comment #45
Oh yeah, it is a never ending story.
Hope its taken to PM.
  |     |   Comment #47
The answer is competition. As long as enough depositors are willing to move their money to FIs with higher rates, there will be some pressure for FIs to have higher rates as the FED rate rises. (sadly too many are content to simply leave their money in accounts at the "big" banks with some of the lowest rates going)
  |     |   Comment #28
Oil and the XLE Energy ETF are up nearly 10% this week. This is bullish for inflation and likely rates as well. Likely to keep the Fed on edge. BTW the PCE the Fed’s favorite inflation indicator hit 6.8% this AM yet another fresh 40 year high:

  |     |   Comment #32
Sounds almost like you're cheering the continuing high inflation, Robb, for the sake of its interest rate effect and presumably higher CD yields in train.

For many of us with mega CD deposits maturing in late 2023/early 2024 (five years after peak rates from last cycle) we can't help but do the same, and hope to renew at high rates just as the current ascent reaches its next peak, with the rocketing inflation dropping like a stone shortly thereafter, hehe.
  |     |   Comment #35
Hi Greg…no not really but do have a decent position in ibonds as a hedge. Thought the market reaction post the Fed hike was interesting and saw even some terming the Fed conference as a major pivot. A mild shift maybe to data dependency. Personally don’t see how Powell can consider 2.25% on the Fed funds rate neutral policy in light of a 9.1% CPI. If history is any guide the Fed has a ways to go on the inflation front. Interesting times to be sure in terms of how this plays out over the next year.
  |     |   Comment #36
My take is that the markets have just blindly decided that 2% is the long term inflation rate ("for the rest of humanity", as one commentator recently put it), no matter how economic forces may have changed in the post-Covid world, and that the Fed can't/won't keep hiking given that delusion they're under,, - the danger, of course, coming if the Fed is under the same delusion (like with the "transitory" remarks of a few months back).

Agree with you in questioning how a 2.25% Fed funds rate can be neutral with 9.1% inflation, if you recall Powell considered that same rate neutral when inflation was below 2%.. If he's truly serious about resolutely attacking the rising prices, then that rate will have to substantially rise from here IMO, and then stay much higher than anything we've been used to. I mean suppose inflation moderates to 4 or 5 percent over the next 6 months, and then stubbornly persists there. Would that be grounds for a Fed reversal and extended series of rate cuts? I don't think so. The markets will need a reset, something that always takes blunt force to accomplish.
  |     |   Comment #42
#36 - The long-term inflation rate goal of 2% comes from the Fed itself, not from the markets -

“Why does the Federal Reserve aim for inflation of 2 percent over the longer run?

The Federal Open Market Committee (FOMC) judges that inflation of 2 percent over the longer run, as measured by the annual change in the price index for personal consumption expenditures, is most consistent with the Federal Reserve’s mandate for maximum employment and price stability. When households and businesses can reasonably expect inflation to remain low and stable, they are able to make sound decisions regarding saving, borrowing, and investment, which contributes to a well-functioning economy.”
  |     |   Comment #33
inflation bites. i'd rather get a 2% yield on "safe" money in a 2% inflation environment than a 5% yield during 7% inflationary times.
  |     |   Comment #46
Navy FCU just added a market leading 33 month 3.3% add-on special. Seems like a no brainer for rate insurance by putting in the minimum. Minimum 1k…max 100k.

  |     |   Comment #49
Agree! 100k max however
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