Shifting Stance - Fed Implies No Rate Increases In 2019

The Fed's latest announcement implies it won't raise the federal-funds-rate target for the remainder of 2019. However, bank rates on deposits may still rise.
By Richard Barrington
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FEDERAL-FUNDS-RATE TARGET: 2.25 to 2.50 percent

The most significant news to come out of the latest Federal Open Market Committee (FOMC) meeting didn't concern the Fed's decision on interest rates at this meeting. The big news was that the Committee signaled an important change in expectations for rates over the remainder of the year.

Implications of the latest Fed announcement

In its meeting that concluded on March 20, the FOMC decided to make no change in the current federal funds interest rate, which is being maintained in a range between 2.25 and 2.50 percent. This came as no surprise because the Fed was widely expected to slow down the pace of interest rate increases this year. However, information released in the Fed's post-meeting statement and in its latest economic predictions went beyond implying a slowing of the pace of rate increases; it strongly implied that the Fed might not raise rates at all this year.

Here are three clues that the Fed might see interest rates flattening out over the course of 2019:

  1. An observation that economic growth has slowed
    The Fed's statement noted that information received since it last met at the end of January suggests a slowdown from the pace of growth in the fourth quarter. If the Fed's assessment is accurate, that would make the first quarter of 2019 the third consecutive quarter of slowing economic growth.

  2. A continued emphasis on patience
    For the second consecutive meeting, the FOMC has stated that, in light of economic conditions, it will be patient in assessing the need for any future adjustments to monetary policy. While such language is not very specific, it is significant in the context of the Fed's attempts to manage public expectations so policy moves do not disrupt markets.

  3. A cut in the Fed's year-end rate projection
    Beyond the words of the FOMC statement, there was a major change to the numerical projections the committee puts out once a quarter. In the previous set of projections released in December, the consensus expectation of the FOMC was for the federal funds rate to be at 2.9 percent by the end of 2019. That would imply two quarter-point increases over the course of 2019. Now, the latest consensus projection is for rates to be at 2.4 percent at year end. Since that falls within the range current range of Fed interest rates, it implies no change is expected for the remainder of this year.

The Federal Reserve Board's long-term projections remain that interest rates will rise eventually, and higher interest rates would be in line with the Fed's stated goal of policy normalization. Policy normalization would involve raising rates to be more in line with historical levels. However, based on the latest statement and projections by the Fed, it may take clear evidence of a revival in economic growth and/or a sustained flare-up of inflation before the Fed starts to raise rates again.

Will consumers see bank rates rise?

While many investors and borrowers may applaud a pause in rising interest rates, it may come as frustrating news for consumers with deposits in savings accounts, CDs or money market accounts. However, just because the Fed is holding off on further rate increases does not mean that banks will.

According to the MoneyRates America's Best Rates Survey, bank rates have been rising since early 2017, and the pace of increase has been getting faster. In particular, a handful of banks seem to have broken into an all-out rate war in an attempt to lure deposits.

Who wins that kind of rate war? Consumers who shop for the best rates. While the average savings account rate remains below inflation, the best savings account rates are now clearly above inflation, giving depositors their best chance in years to get ahead of rising prices.

More resources for journalists and consumers:

Reality Check: Evaluating the Federal Reserve Board

Rising Interest Rates: Consumers Face Unprecedented Risk

Your strategy if the bull market is over

The MoneyRates America's Best Rates survey identifies the most consistently competitive banks every quarter

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5/2/2018Interest rates surge despite Fed's inaction
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