Look for Bank Rates to Move Even As Fed Stands Pat

The federal funds rate target of 2.00 to 2.25 percent remains unchanged after the November 7, 2018 FOMC meeting -- but banks are raising interest rates independently.
By Richard Barrington
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fed-update-articleOn November 8, the Federal Open Market Committee (FOMC) announced that it was leaving its short-term interest rate target unchanged at 2.00 to 2.25 percent. Despite the lack of change in the federal funds rate, consumers should expect rates on everything from savings accounts to credit cards to continue to rise.

Federal funds rate: 2.00 to 2.25 percent, holding steady for now

It came as no surprise that the federal funds rate was unchanged at the most recent meeting, but this does not mark a change in the Fed's policy to push rates higher over time.

With economic growth remaining steady and inflation moving a little ahead of the Fed's 2 percent target, the fundamentals certainly favor an increase in interest rates. After all, the Fed's current rate target is roughly equal to the rate of inflation over the past year, whereas historically the Fed's rate has averaged well over 1 percent more than the prevailing inflation rate.

The FOMC is conscious of the fact that the federal funds rate target is below normal, and it has stated its intention to restore it to a more normal level over time. A big reason for this is that if interest rates are too low the next time the economy goes into a recession, the Fed will have little room to lower rates as a monetary stimulus.

So if both the economic environment and long-term monetary strategy support the case for higher interest rates, why did the Fed pass on raising rates at this meeting?

Well, if you are cooking a batch of chili and decide it tastes a little bland, you don't just dump in an entire extra container of chili powder all at once. You stir in a little, let it simmer for a while, and then see what effect it has had. That's exactly what the Fed is doing with interest rates.

Over the past year, the Fed has raised interest rates by a quarter of a percent at every other FOMC meeting. Having raised rates at their previous meeting, the Fed was due to let things simmer at the November meeting. Unless economic conditions change significantly, though, expect the Fed to raise rates again in its mid-December meeting.

Consumer alert: Bank rates are rising

Even with the Fed standing pat for the time being, consumers cannot afford to be complacent about rates.

First of all, the trend suggests that the Fed's decision not to raise rates this time around is just a temporary pause rather than a change in course. Second, banks and other financial institutions have been steadily raising rates with or without the Fed.

This means you are likely to see bank rates continue to trend upward. There are two key takeaways here for consumers:

  1. You may be missing out on the best savings account rates.
    Most banks have been slow to raise the rates they pay savings account customers, but a handful of banks are leading the charge and have surged far ahead of the industry average. If you settle for average rather than searching for the highest savings rates, you could be missing out on a significant amount of interest. The same principle applies to CD rates and money market account rates.

  2. Credit card rates have been rising especially fast.
    The Fed has raised rates by a total of 1.75 percent since late 2015. Over the same time period, credit card rates have risen even further, by a total of 2.76 percent. With credit card debt getting ever more expensive, consumers should make plans to pay down credit card debt, shop for a lower credit card rate and, if you have multiple credit cards, make sure you use the one with the lowest current rate.

Don't let the fact that the Fed took no action on rates in its most recent meeting fool you. Rates on consumer financial products continue to rise and, if you don't react accordingly, it will probably cost you.

Previous Federal Reserve Board Update Articles:

FOMC Date2018 FOMC Meeting Update Articles
1/31/20183 ways to profit when market rates outpace the Fed
3/21/2018Fed rate increases not helping consumers
5/2/2018Interest rates surge despite Fed's inaction
6/13/2018Your strategy when the federal funds rate rises
8/1/2018Banks aren't waiting for Fed rate increases
9/26/2018September 2018: Rate hike may hurt more than help consumers
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