At the completion of its two-day FOMC meeting, the Fed issued a statement very similar to its December statement. The only change was an acknowledgment of the hit the economy has taken in the last two months from the resurgence of the pandemic and acknowledgment that vaccination progress will be an important factor in how the economy progresses. There was no change in the Fed’s forward guidance on rates or asset purchases. The statement language remains the same as December's language which means that it’s very likely that it will be a very long time before the first Fed rate hike.
No one dissented at today’s meeting.
After the FOMC statement came out, Fed Chair Jerome Powell took questions from several reporters. His answers can essentially be summarized to say that we should expect this period of zero rates to last for several years. The factors that could change that are very unlikely to occur. One possible factor are asset bubbles being created by the low rates. CNBC economics reporter, Steve Liesman, asked Fed Chair Powell the following question:
How do you address the concern that super easy monetary policy (asset purchases and zero interest rates) are potentially fueling a bubble that could cause economic fallout?
The following is an excerpt of Fed Chair Powell’s reply:
The connection between low interest rates and asset values is probably something not as tight as people think because a lot of different factors are driving asset prices at any given time.
High inflation could also cause the Fed to hike rates, but the Fed considers this to be very unlikely. Fed Chair Powell went into details explaining why that’s the case. The following was part of a question from Michael Derby of the WSJ that prompted Fed Chair Powell’s explanation:
How much inflation is the Fed willing to tolerate before it acts to restrain price pressures?
The following is a long excerpt of Fed Chair Powell’s reply:
The way we’ll react is we’re going to be patient. Expect us to wait and see, and not react if we see small and what we would view as very likely to be transient effects on inflation.
It helps to look back at the inflation dynamics that the US has had now for some decades and notice that there has been significant disinflationary pressure for some time, for a couple of decades. Inflation has averaged less than 2% for a quarter of a century, and the inflation dynamics with the flat Phillips curve and low persistence of inflation is very much intact. Those things change over time. We understand the inflation dynamics evolve constantly over time, but they don’t change rapidly. So we think it’s very unlikely that anything we see now would result in troubling inflation. Of course if we did get sustained inflation at a level that was uncomfortable, we have tools for that. It’s far harder to deal with too low inflation. We know what to do with higher inflation. Should the need arise, we would have those tools, and we don’t expect to see that at all.
In terms of how much, what we said is that we would like to see, because inflation has been running persistently below 2%, we would like to see it run moderately above 2% for some time. We have not adopted a formula. We are not going to adopt a formula. We use policy rules and formulas in everything we do, consult them constantly, but we don’t set policy by them. We don’t do that, and so we’re going to preserve an element of judgement. Again, we’ll seek inflation moderately above 2% for some time, and we’ll show what that means when we get inflation above 2%. The way to achieve credibility on that is to actually do it, and so that’s what we’re planning on doing.
Before the Fed starts to think about raising rates, it will first start tapering its asset purchases. During the last zero rate period, the Fed first started to talk about tapering in May 2013. Tapering started in December 2013. Two years passed until the Fed did its first rate hike in December 2015. Widespread deposit rate gains didn’t come until mid 2017.
When the Fed started to talk about tapering in May 2013, the markets were shaken and long-dated Treasury yields increased significantly in a period that’s known as the Taper Tantrum. As I described in previous posts, we also saw small gains in online CD rates and credit union CD rates during this time.
There has been talk that tapering could begin near the end of this year. Based on Fed Chair Powell’s press conference, that seems unlikely. He was asked by Michael McKee of Bloomberg about tapering and how the Fed can avoid another Taper Tantrum. Below was part of Fed Chair Powell’s reply:
In terms of tapering, it’s just premature. We just created the guidance. We said we want to see substantial further progress toward our goals before we modify our asset purchase guidance. It’s just too early to be talking about dates… We’ll have to see actual progress. When we see ourselves getting to that point, we’ll communicate clearly about it to the public. So nobody will be surprised when the time comes, and we’ll do that well in advance of actually considering what will be a pretty gradual taper.
This reply by Fed Chair Powell sure makes it sound that we shouldn’t expect tapering this year. Based on Fed Chair Powell’s view of inflation, the Fed’s new inflation framework and the Fed history during the last zero rate period, it seems unlikely that we’ll see a Fed rate hike before 2024.
Future FOMC Meetings
The next three FOMC meetings are scheduled for March 16-17, April 27-28, and June 15-16. The March and June meetings will include the summary of economic projections.
Strategies for Savers to Maximize Cash Yield
Based on what the Fed continues to say and based on how deposit rates have fallen, I’m afraid we are in for a long period of very low deposit rates. It’s possible that we’ll see some small rate gains on long-term CDs when the Fed starts talking about tapering. However, as I described above from Fed Chair Powell’s press conference, it seems unlikely that the Fed will start talking about tapering in 2021.
The best hope for savers is that a strong economic recovery discourages banks into further cuts of their deposit rates. A strong economy will give a boost to loan demand which will put pressure on banks to increase their deposits. Also, a strong economy will boost the stock market which encourages investors to move their cash out of banks and into stocks. That will push banks to at least refrain from more deposit rate cuts. It may also push some into raising deposit rates.
CD rate declines have been slowing in the last few months as seen in our Online CD Indexes (see online 1-year and 5-year averages.) If the economy does have a strong recovery this year, it’s possible that we may be at a bottom for CD rates. However, based on what the Fed is saying, we shouldn’t expect any significant CD rate increases in 2021.
For 2021, we may not see any higher rates than what’s available now. As I listed in my latest CD summary, there are a few easy-to-join credit unions with 5-year CD rates between 1.30% and 1.50%. For nationally-available 5-year CDs at banks, the top rates are only 1.00%.
With CD rates so low, it seems to make more sense to keep more of your “safe money” in liquid bank accounts, such as online savings accounts and/or high-yield reward checking accounts. Like CD rates, online savings account rates appear to be reaching a bottom. So it’s possible that an online savings account that currently has a 0.50% APY will be able to maintain this rate for the rest of this zero rate period. With today’s best CDs, you can earn 2x to 3x this rate.
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.