FOMC Statement Points to Savings Account Rates Remaing Low for Now
The Federal Open Market Committee (FOMC) wrapped up their two day meeting yesterday and right after the meeting the Fed released their statement. There were no surprise announcements from this conference so we can expect savings rates to remain where they are for now.
In the Fed's statement they said they will continue their purchases of $40 billion a month in mortgage-backed securities (MBS) and $45 billion a month in long term U.S. Treasuries. The Fed plans to keep the purchasing going even as the economy and job markets improve.
The Fed Chairman, Ben Bernanke, also held a press conference after the meeting and said, “We may adjust the flow rate of purchases month to month to appropriately calibrate the amount of accommodation we’re providing, given the outlook for the labor market.” The Fed plans on adjusting their purchases each month based on several measures including payroll numbers, wage growth, and jobless claims.
The Fed has been trying to increase economic growth and lower the unemployment rate ever since the "Great Recession." The Fed has been doing this by providing liquidity to the markets (buying MBS and long term Treasuries) and by keeping its key interest rate low. The Federal Funds rate has been just above zero percent for over 4 years now.
The Fed plans to keep the rate that low until the unemployment rate falls below 6.5 percent and as long as the outlook for inflation is less than 2.5 percent. The Fed believes the unemployment rate will fall below that level sometime near the end of 2015. The Fed also believes inflation will remain below 2.5 percent for the next two years.
If the Fed is right, we can expect the best savings rates to remain just above 1.00 percent for the next couple of years. If the Fed is wrong, it will probably be due to inflation going higher than 2.5 percent, which means interest rates will start raising pretty quickly. A Fed funds rate just above zero percent is very accommodating, so the Fed will have to quickly increase rates to at least 2 percent for the Fed's stance to be neutral and not contributing to inflation.
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