Fed Meeting: Zero Rate Policy Continues - Strategies for Savers

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At the completion of its two-day FOMC meeting, the Fed issued a statement very similar to its March statement. The only change was in the economic overview. The April statement is a little more positive about the progress on the recovery. Also, the new statement is acknowledging a rise in inflation, but as expected, the Fed considers this a temporary situation. The following are excerpts of the two statements that show the changes:

Excerpt of the March FOMC statement:

Following a moderation in the pace of the recovery, indicators of economic activity and employment have turned up recently, although the sectors most adversely affected by the pandemic remain weak. Inflation continues to run below 2 percent.

Excerpt of the April FOMC statement:

Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened. The sectors most adversely affected by the pandemic remain weak but have shown improvement. Inflation has risen, largely reflecting transitory factors.

The Fed also removed the word “considerable” in the description of the risks to the economy that exists:

Excerpt of the March FOMC statement:

The ongoing public health crisis continues to weigh on economic activity, employment, and inflation, and poses considerable risks to the economic outlook.

Excerpt of the April FOMC statement:

The ongoing public health crisis continues to weigh on the economy, and risks to the economic outlook remain.

Everything else in the April statement was the same as the March statement. The zero interest rate policy and the asset purchases remain the same, and like March, there was no dissent. All eleven voting members of the FOMC voted for the monetary policy action in the statement.

Press Conference

After the FOMC statement came out, Fed Chair Jerome Powell held a press conference that included providing an opening statement and taking questions from reporters. Several reporters tried to get the Fed Chair to provide more details on when the Fed will decide to start tapering its asset purchases. They ask several questions that were basically the same. Fed Chair Powell was careful to give the same basic reply by saying that the Fed is looking for “substantial further progress” toward their goals. Fed Chair Powell’s opening statement included details on employment which provided insights on what “substantial further progress” means. Here’s an excerpt of his opening statement:

Employment rose 916,000 in March, as the leisure and hospitality sector posted a notable gain for the second consecutive month. Nonetheless, employment in this sector is still more than 3 million below its level at the onset of the pandemic. For the economy as a whole, payroll employment is 8.4 million below its pre-pandemic level. The unemployment rate remained elevated at 6 percent in March, and this figure understates the shortfall in employment, particularly as participation in the labor market remains notably below pre-pandemic levels.

Fed Chair Powell also continued to downplay the risk of high inflation. Before the Fed starts to publicly worry about inflation, it’s probably going to take several months of inflation rising to levels that haven’t been seen in decades. The Fed seems to think such a condition would be very unlikely given the unemployment condition.

In summary, the Fed showed no signs that it will be making any changes to policy for some time to come. All signs point to the Fed holding steady with its zero rate policy for the rest of 2021 and very likely through 2022.

Future FOMC Meetings

The next three FOMC meetings are scheduled for June 15-16, July 27-28, and September 21-22. The June and September meetings will include the summary of economic projections.

Potential bleak future for savers

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 unlikely that deposit rates will receive any help from the Fed through 2023.

The best hope for savers is that a strong economic recovery pushes banks into raising deposit rates. A strong economy will give a boost to loan demand which will force 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 also push banks to raise their deposit rates to increase deposits.

One thing that’s different from the last zero rate period is American’s savings rate. The pandemic has suppressed spending. The lower spending along with the stimulus checks have allowed many Americans to build their savings. This has resulted in record deposit levels at banks and reduced loan demand. These conditions have contributed to the record low deposit rates that we’ve seen in the last year. I’m afraid this condition may not improve much until the pandemic and the stimulus checks have completely ended.

Low deposit rates are bad enough, but if we see high inflation, savers will get punished even more. With the unprecedented fiscal stimulus, this is a risk. Due to the Fed’s new inflation framework, savers may have to live with a year or more of inflation that exceeds the Fed’s 2% inflation target. It may not be too bad if inflation is just a little above 2%. However, there could be major problems in the markets and in the economy if inflation starts to rise well above 2%. The Fed thinks it knows how to handle high inflation. Hiking rates would probably be the primary tool. However, this could cause economic turmoil and a recession. Deposit rates may rise during this time, but once the economy falls into a recession, the Fed would likely go quickly back to rate cuts.

Deposit rates during the last zero rate period (2008-2015)

As I mentioned above, this new zero rate period may be worse for savers due to how the pandemic has affected American’s savings rate. Nevertheless, it may still be useful to review this history. Once the pandemic has fully ended, conditions may start to be similar to what was seen during the last zero rate period.

Deposit rates did rise for periods of time during the last zero bound years (from Dec 2008 to Dec 2015). History suggests that we can see small deposit rate hikes even without Fed rate hikes. The 2013 Taper Tantrum was a period when the Fed started to taper its bond buying and long-dated Treasury yields had big gains. For example, the 10-year Treasury note had a yield of 1.86% when 2013 began. By the end of 2013, the 10-year yield had risen to 3.04%.

PenFed’s 5-year CD yield went from 1.15% in the summer of 2013 to 3.04% by December 2013.

CD rates at online banks took more time to rise. Both Ally and Discover’s 5-year CD yields reached a pre-2020 bottom of 1.50% in 2013. By September 2014, Ally’s 5-year CD yield had risen to 2.00% and Discover’s had risen to 2.10%.

CD rates did fall after the above highs. PenFed’s 5-year CD yield fell to 1.21% in 2014 and then again in 2016. Ally and Discover’s 5-year CD yields fell to around 1.75% in 2016 and 2017. Even after the first couple of Fed rate hikes, it took awhile before the 5-year CD rates to rise. Those early Fed rate hikes impacted the markets and the economy, resulting in lower Treasury yields.

For online savings accounts, there were some increases during the 2008-2015 zero rate years, but for the most part, rates remained below 1%. No sustained increases occurred until we were well into the Fed’s rate hiking cycle in mid 2017.

So based on the 2008-2015 zero rate history, we could see some modest increases of CD rates and a few CD specials that may offer rates a little higher than the online bank CDs. We’ll probably have to see 10-year Treasury yields well above 2% before we start to see any significant improvements in CD rates. The 10-year yield ended Wednesday at 1.63% (just 1 bp higher than it was during the March Fed meeting.)

Strategies for savers to maximize cash yield

The possibility of small CD rate increases over the next couple of years isn’t anything to get excited about, but it does suggest that we shouldn’t rush into CDs now. Keeping more cash in online savings accounts and/or high-yield reward checking accounts seems to be a better strategy than opening new CDs.

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 rate 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%.

As we have seen in the last couple of months, a few credit unions are still coming out with CD specials. Of course, those CD rates are nothing to get excited about. Nevertheless, they’re much higher than the rates you can currently get from online banks. For example, NASA FCU has been offering a 49-month CD with a 1.50% APY. That’s 3x the rate that you can get at most online savings accounts.

If you can get CDs with rates well over 1%, they still might be worth it for at least some of your savings just in case we’re headed into a very long zero rate period.

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.


Comments
GreenDream
  |     |   Comment #1
@Buckeyes in the last iteration of this thread you asked about tellus boost but then this iteration was posted before you got a response. Since I'd never heard of it, I did a quick search and found their "tellus-boost-your-questions-answered" blog post (you'll have to search for it yourself, as I'm not sure if a link would be allowed, the mods can get picky about links). in which they describe "how it works" thusly:

"Tellus is built for two types of people. Savers, who use our high-yield cash account to earn a better return than they would get from their bank, and Owners, who use our suite of property management tools to manage their rental properties with ease. Funds that are deposited in the Tellus Boost account by Savers are used to issue loans to Owners. These loans are secured by their property or real estate, the same way that your typical bank might issue a mortgage to its clients. Tellus sits in the middle, and Savers don’t have any direct real estate or loan exposure. By servicing both sides, we’re able to have full control over the process from start to finish. This helps reduce the level of uncertainty and instability you may have come to expect from mainstream interest rates."

and their description for how they can offer rates so high:

"When an Owner takes out a loan with us, they’re required to repay the loan over time, usually in monthly installments. Our loans typically have interest rates that exceed the amount that we pay Savers for those funds. The difference between these rates is how Tellus makes money, and more importantly, how we can afford to pay you a rate that’s so much higher than our competitors! Most traditional savings accounts as well as “high-yield” savings competitors out there have rates that fluctuate greatly over time. We offer 3% APY year-round, while many of our closest competitor’s rates often drop below even 1% APY."

And FYI, tellus boost is not a bank and thus not FDIC insured (they even say so in the above mentioned blog post as well as why they think you shouldn't be worried about that fact.)

Hope that helps.
GreenDream
  |     |   Comment #2
Some additional FYI about tellus:
1) It looks like the only way to create/manage an account with them is through their App on your phone or tablet.
2) their FAQ page mentions something about a 60-day "aging" process for ACH transfers (aging doesn't apply to wire transfers). I think it means money that was ACHed in that you want to withdraw has to have been in the account for at least 60 days, but I'm not entirely sure about that.
3) according to the FAQ, customer service is reachable only through the app or email.
Buckeyes
  |     |   Comment #3
thanks again Green. Looks like my inquiry was pulled. i thought this site was mostly about exchanging ideas to save money. Apparently only with banks, or in our current banking environment, not at all. They showed up on my Facebook page via an advertisement. Not sure why that happened. If it's safe, 3% is hard to pass up with inflation going up but not our savings rates. I'm certainly not promoting them. Was inquiring to see if anyone had experience.
me1004
  |     |   Comment #4
I think Ken has it right. Notice how he talks of inflation, sounds like he is talking of maybe 5%, or more, and they still won't move on rates. He was talking of multiple decades since we will have seen such high inflation, and that suggests at least 5% and still no Fed move on hiking rates.

This is first thanks to Trump, I have been saying for years that he was stacking the Fed with low rate hawks who would keep rates low for years to come, they now control the majority vote on the Fed and will for a few years. Biden won't have had enough appointments to the Fed Board until well into his third year in office to shift control, but don't presume he will be naming high rate hawks. Be happy if he names wishy washy moderate rate people who will go along with the low rate hawks too much. Even when they finally raise rates, they very well may do too little and raise them too slowly for too long.

his is a crisis for savers, being fleeced for being responsible about their money. And then taxed at higher than capital gains too, getting hit coming and going and every which way -- like a bunch of dupes.

Bank accounts are over, we are being severely cheated by them, we deserve a reasonable return on our investment just lie, any other investment, but we are not getting anything near that. We deserve 5%, leas that=n the 8% considered average for bonds. We have not see 5% in a very long time, and not can’t even get 1%. 3% is not even reasonable, 4% at least starts flaunting with it, but just not good enough especially after taxes. They do all possible to keep us caught between a rock and a hard place, scaring us from daring to revolt — but a savers revolt is absolutely necessary. It isn’t going to happen, at least not is a formalized anyway, but it is necessary. But we need to flood out of the banks and into other investments, we can’t just keep losing money in the banks or at best merely hold the line, where everyone else is making money, lots of money, off our money. What has been going on now for nearly two decades is taking our money form us and giving it to everyone else free and everyone else making lots of money off it. Seeing that we let it happen has only given them confidence they can fleece us, and they have made that longterm policy now. Savings in banks and credit unions are now only for fools.

That security of FDIC or NCUA insurance is good, but it is not saving your money, you are losing your money by relying on that security, you are not getting ahead at all for your investment in bank or credit union savings, you are not even holding the line, you are losing money. It is now definitively time to abandon savings in banks and credit unions, you must go to mutual funds as next best bet, and you can take maybe government securities or the lower performing categories of funds as more conservative and safe -- hey they still do better than banks, and they're more liquid too. You can't just keep hemorrhaging your money to punitively low rates and think that is reasonable.
Buckeyes
  |     |   Comment #5
the only thing that keeps me sane in this impossible to save environment is the fact that almost all of us are making up for it in the stock or real estate markets. For instance I am sitting on my parents very modest home that has gained 100k in value because of morons willing to pay for a patch of land. If you take what my parents paid for that in 1955 and put it in today's dollars it should be worth about 85K. 2 years ago about 125K.  Now, 225K. That is big money for a place in the middle of nowhere.  Good for me, almost feel guilty, bad for first time owners and those looking with modest incomes. Yea 15 dollars an hour will help those people buy a home! Who the heck are the politicians trying to fool? You cant live on that unless there are 3 of you making it 40 hours plus a week in the same household! Let's face it. The world is mega expensive now. And banking is DEAD. But I still come here for the good reads!
111
  |     |   Comment #7
I come here for the good reds too, Buckeyes. But in addition, I keep hoping to read that some bank will offer me one of the promotional toasters of yesteryear for opening a new account! (LOL)
Buckeyes
  |     |   Comment #8
@111- I should have clarified and said "discussions". The actual story reads are depressing, no fault of Ken. But I do like the verbal jousting that is occasionally allowed by the moderators. I bet if we had a group facetime it would be hysterical.
P_D
  |     |   Comment #9
"Biden won't have had enough appointments to the Fed Board until well into his third year in office to shift control, but don't presume he will be naming high rate hawks."

If Janet Yellen, Biden's pick for Treasury Secretary is any indication of his choices I'd say you are on pretty solid ground with that prediction. She is to savings rate increases what Andrew Cuomo is to feminism.

"That security of FDIC or NCUA insurance is good, but it is not saving your money, you are losing your money by relying on that security, you are not getting ahead at all for your investment in bank or credit union savings, you are not even holding the line, you are losing money."

The "security" that FDIC and NCUA offer kind of reminds me of standing guard outside the front door of your house while the robbers come in the back door and clean out the house. Getting dollars back doesn't help much if those dollars don't buy anything.

"Bank accounts are over, we are being severely cheated by them, we deserve a reasonable return on our investment just lie, any other investment, but we are not getting anything near that. We deserve 5%, least..."

Have to take mild exception to this one. Investors don't "deserve" any rate of return and should not receive returns based on fairness. It should be based on what the market is willing to pay without interference from government. But I'll give you this much. Once government interferes in the markets, as it is doing right now in an unprecedented way, flooding the banks with deposits at taxpayers' expense, there comes a point where that interference is most definitely NOT fair. And I think that is what is happening right now.

I think inflation is going to be worse than the Fed is making it out to be. And worse yet, I think that once the dust from the pandemic settles, the policies that this administration have already started to put in place are going to lead to big job losses and household income declines. Higher prices and lower income. That is the definition of a lower standard of living.

And I think those evil rich people like us who were responsible enough to save money and independently secure their own retirement without having to take money from taxpayers or anyone else are directly in the crosshairs of this administration's scope.  Independence is to be punished, dependency rewarded.  That's the new paradigm in Washington now.
NYCDoug
  |     |   Comment #15
Kiplinger's Closing Bell market summary for May 4th reads, in part:

In taped remarks to The Atlantic aired today, Yellen said that "it may be that interest rates will have to rise somewhat to make sure that our economy doesn't overheat" — a statement that runs counter to the Federal Reserve's message that rate hikes are a long way away.
jimdog
  |     |   Comment #10
Agree with most all you said. I moved my money out of banks and into credit unions 5 years ago and have received much higher rates. Everyone needs to take their money out of banks and move it to credit unions.
GreenDream
  |     |   Comment #16
I thought you'd moved it all into gold back in July (right as it was reaching it's peak in price). Haven't heard you bagging about how gold has been rising since then. Wonder why?
Ratesaver
  |     |   Comment #6
crazy but true what me1004 has said about the trump administration and all of the above statements of we are getting used now... This took the words out of my mouth... Inflation is ongoing as one sees when they go to buy anything now... I can only hope of a change soon...
jimdog
  |     |   Comment #11
Inflation is here and running wild. Went to the grocery store today and could not believe some of the prices. $2 for 1 cookie. $6.50 for a bag of bagels! Cereal sky high and the boxes are no longer 16 oz.
jimdog
  |     |   Comment #12
And the Fed says they are keeping rates low for the poor! They are just making them poorer and the rich richer.
Buckeyes
  |     |   Comment #14
when everyone is forced to pay $15 or up at the store, prices have to follow. I spent over 10 bucks on a Big Mac meal yesterday. Back to stores, is it any wonder why so many of them are "suggesting" self checkout, eliminating more jobs? And who can live on $15 an hour anyway?
GreenDream
  |     |   Comment #17
Where the heck are you shopping?

$2 for 1 cookie? Walmart sells their great value cookies for less than $2 for a 25oz family size package. Even "name brands" sell in packages containing multiple cookies for not much more than $2. If you're paying $2 per cookie, you're not a very smart shopper.
Buckeyes
  |     |   Comment #18
last time i was out i noticed subway has stopped many of their meal deals as they rang up my drink and cookies separately. the two cookies were nearly 2 bucks, and combined with the unimpressive foot long and drink i had to shell out 13 bucks. like i say, the world has gotten expensive.
w00d00w
  |     |   Comment #13
core PCE reported at 1.8% for March, perhaps it will meet or exceed the Fed's 2% target by the June meeting. also, another 23% surge in real disposable personal income in March.
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