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.
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.