A recent Yahoo Finance article highlighted the ever-growing separation between what the Fed says will happen to short term interest rates and what the markets say is going to happen. Apparently the Fed is trying to convince everyone that they will raise short-term interest rates at a faster pace now that they claim the US economy is stabilizing, inflation is under control, and we have returned to the 6.5% unemployment figure they love.
Wall Street economists disagree, of course.
They claim the Fed is poor at forecasting the economy. [I don’t know about you, but since it’s the Fed’s job to monitor the economic activity of the US, I find this claim alarming.] Because of this lack of faith in the Fed, the markets believe that we will see a more gradual increase in rates.
Wondering yet why anyone cares? Look no further than your savings account.
The Federal Reserve’s interest rate policy has a direct impact on short-term interest rates, including savings account and money market rates. There’s a more cursory connection to car loans and other short-term vehicles. Mortgage rates are only loosely related.
Do we care whether it’s the Fed or Wall Street who is correct? We have to if we’re saving money.
Since 2008, the Fed Funds rates has been 0%, or close to it, but I probably don’t have to remind you of this since you see it every month when you earn 2 cents on the money you have in the bank.
That means for the last six years we’ve worked hard at saving and building up cash reserves, only to earn less than inflation on the money we have in the bank.
I appreciate the disagreement between Wall Street economists and the Fed; however, in this case, I really hope that the Fed is forecasting better than they have been given credit.
Why I Want the Fed To Be Right
When rates stay low people get savings fatigue and unrest. When this happens, investors start looking for more risk and more return. This mentality forces investors to take money that should sit safely in a bank account covered my FDIC insurance and invest it in crazy markets like junk bonds or even stocks. Markets then swing more than they should because the wrong money is invested in them….scared money that shouldn’t have been there in the first place.
There is nothing wrong with stocks or junk bonds; however, there is a time and place for these riskier investments, meaning you don’t take your mortgage or bread money to Vegas and put your money on red. The longer rates stay at historic lows, the more risk you have for a trip to Vegas.
Do you think short term interest rates are going higher anytime soon? Do you feel as good about the economy as the Fed?
Photo: Global X
We’re heavy in cash right now so I’d love to see some higher rates than the .75% we’re currently getting. Financial Samurai wrote some really interesting things about long term CDs he held from back when the rates were much higher…might be something for us to think about (like a long term CD ladder) if rates improve significantly.
I love a CD ladder when rates actually make sense for you to ladder. In fact, just a little over 6 years ago, you could get 5-7% in CDs which have FDIC insurance up to $250,000. At less than 1%, though, they hold a lot less appeal.