Consumers Not Limited By Fed's Rate Decision

You can do something the Federal Reserve can't. Despite the June 2019 Fed decision not to change the federal funds rate, you can hike the rate you earn on savings, money market and CD accounts.
By Richard Barrington
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fed-update-articleFEDERAL-FUNDS-RATE TARGET: 2.25 to 2.50 percent

The Fed's June 20, 2019 announcement is a good time to remind consumers that they are not limited by the Federal Reserve's decision not to raise the federal funds rate. While the Fed influences interest rates, it does not directly control most of them.

First of all, when the Federal Reserve Board periodically announces that it is raising or lowering interest rates, it is referring to the rate at which banks borrow for day-to-day liquidity needs. While this does have a ripple effect that can impact rates more visible to consumers, rates such as what you earn on your savings deposits or what you pay on your credit card or mortgage depend on a great many other factors.

Another thing that limits the Fed's control of interest rates is that they are compelled to act according to economic conditions. But many times those same conditions affect market-based interest rates from the bond market to banking products even more rapidly than the Fed's response can.

So, if you want to anticipate - and profit from - interest-rate moves, the federal-funds-rate announcements are not the only game in town. There are still opportunities to benefit despite today's announcement of no rate change.

How long can the federal funds rate go unchanged?

It's June 2019 now, and the Federal Reserve has maintained interest rates at a target of between 2.25 percent and 2.50 percent since December 2018. Its current set of economic-projection materials, an update of which were released in conjunction with today's Fed meeting announcement, call for the federal funds rate to be at 2.4 percent when 2019 comes to a close. In other words, as the Fed sees things today, interest rates will remain within their current target range for the remainder of this year.

So does that mean everyone can simply stop paying attention to the Federal Reserve until 2020? No, because the Fed is at the mercy of economic developments and, if something changes decisively - say a marked slowdown in economic growth requiring a stimulative rate cut or a sustained upturn of inflation requiring a rate increase - the Fed's outlook and actions will have to change in response.

In fact, a study found that, of the economic projections the Fed routinely makes, the one that has least accurately predicted future economic developments is its outlook on future federal funds rates. The Fed's limited ability to predict its own actions should not to be taken as a negative. In fact, it positively reflects the Fed's flexibility and adaptability when it comes to incorporating changing economic conditions into its outlook.

For now, that outlook is somewhat fenced in by two conflicting economic realities. Job growth so far in 2019 has been erratic, raising concerns about how much more life the ten-year economic expansion still has. While the simplistic response to that concern is to call for a rate cut, the opposing reality is that inflation over the past few months has been running at a pace above the Fed's 2.0 percent target, and rates remain well below historical norms on both an absolute and inflation-adjusted basis.

Consumers need not wait for the Federal Reserve

This stasis on the part of the Fed at its June FOMC meeting does not mean that consumers cannot benefit from rate changes. Rates you can earn on deposit products have been trending upward over the past couple years, and this trend has continued in 2019. Even without banks continuing to raise rates, the fact that most consumers keep their savings in deposit accounts that pay well below the best interest rates means that you probably have an opportunity to earn more money if you change banks.

So, just because the Fed took no action in its latest meeting doesn't mean you can't take action. Why wait for the Fed when you can implement your own interest-rate increase today and start profiting from it tomorrow?

Previous Federal Reserve Board Updates articles:

FOMC Date2019 FOMC Meeting Update Articles
05/2/2019Federal Reserve Pursues Rate Stability
03/21/2019Shifting Stance: Fed Implies No Rate Increases in 2019
1/31/2019Fed's Low Profile Won't Stop Interest Rates from Rising

FOMC Date2018 FOMC Meeting Update Articles
12/21/2018Expect more stable Fed rates in 2019 after latest hike
11/11/2018Look for bank rates to move even as Fed stands pat
9/26/2018September 2018: Rate hike may hurt more than help consumers
8/1/2018Banks aren't waiting for Fed rate increases
6/13/2018Your strategy when the federal funds rate rises
5/2/2018Interest rates surge despite Fed's inaction
3/21/2018Fed rate increases not helping consumers
1/31/20183 ways to profit when market rates outpace the Fed

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