Federal Open Market Committe Meets This Week, All Eyes on Policy Changes
The Federal Open Market Committee (FOMC) meets on the 19th and 20th to decide the current direction of economic policy. Since the beginning of 2013, the vast majority of economic data released has been positive, 0verall pointing to an economy that is gaining momentum and lowering the unemployment rate.
After years of sub-par economic growth it appears the economy will finally expand fast enough to make a dent in the unemployment rate. The current rate at 7.7 percent is at the lowest point in 5 years but not low enough for the FOMC to pull back on their stimulus measures that are helping growth.
The Federal Reserve Chairman, Ben Bernanke, and the Vice President, Janet Yellen, will probably remain committed to the current policies: buying $85 billion a month in U.S. Treasuries and mortgage-backed securities. These policies are designed to drive long term interest rates lower on mortgages and loans. These policies have been working as 30 year mortgage rates are just above record lows.
Another FOMC policy designed to help the economy growth is the Fed's decision to keep the Federal Funds rate near zero percent. This policy is also keeping CD rates and all deposit rates low and has been keeping rates low for years now. Right now the best CD rates on 5 year certificates of deposit are under 2.00 percent. I remember just a few years ago the highest CD rates on 1 year certificates of deposit were above 2.00 percent.
The FOMC has stated they plan to keep the "accommodating stance" until the unemployment rate falls below 6.5 percent, which they believe will happen at the end of 2015. This also means deposit rates will also remain low until the end of 2015. Of course there is a possibility that rates will increase before then and with the recent positive economic news looks more and more likely.
Even if there is an increase in rates before the end of 2015 the increases won't be that much. We might see 1 year bank CD rates move up to the 1.50 percent range and 2 year CD rates move up to 1.75 percent. That being said it is best to stay invested in shorter term certificates of deposit or savings accounts. That way your deposits can earn slightly higher rates when they finally do move higher.
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