Interest Rates Move Higher Despite Federal Reserve Action

Interest rates on 10 year Treasuries have been moving higher despite the Federal Reserve's action to keep rates low. 10 year bond yields which hit a record low of 1.40 percent back in July 2012, have since moved just above 2.00 percent this week. Ever since the "Great Recession" the Fed has kept the fed funds rate at near zero percent to stimulate the economy.

The recent moves in rates point to an economy that is gaining momentum and might prompt the Fed to increase interest rates sooner than expected.  At this point, the Fed plans to keep the Fed Funds Rate near zero percent until mid-2015.  The Federal Reserve has also been doing "the twist," selling short-term bonds and buying long-term bonds to drive long-term interest rates lower.

These actions have forced bond yields, savings rates, money market rates and CD rates all down to record lows. The Fed has also acknowledged their polices hurt holders of interest-bearing assets but help home values and business values. If you're retired and don't own a home or a business, if you're relying on income from certificates of deposit or savings accounts the Fed has been really hurting your income.

The highest savings account rates these days are just above 1.00 percent and the best CD rates on 1 year certificates of deposit are also just above 1.00 percent. The fed funds rate is expected to stay at zero percent until mid-2015 but there is hope interest rates will rise even sooner, thanks to stronger employment growth.

January's non-farm payroll increased by 157,000, lower than what economists expected. The more positive factor in this month's  report was hiring in the last two months of 2012 was stronger than expected. November's job numbers rose from the originally reported 161,000 to 247,000 and December's job numbers was increased to 196,000 from 155,000.

On the negative side of recent economic data was 4th quarter GDP was lower than expected, in fact growth actually contracted in the final quarter of 2012. The initial estimate of GDP was negative 0.1 percent, the first contraction since the "Great Recession". Although growth was negative there were two one time factors that contributed to the decline.

Government defense spending fell by the largest amount in 40 years and business pared back on inventories. Both are the result of the issues with the fiscal cliff negotiations between Republicans and Democrats. Without these two drags the economy would have expanded in the 4th quarter which means things are better than they seem.

In fact, the economy will grow again in 2013 and hopefully all the fiscal cliff negotiations will be resolved before more damage is done. The last factor keep back an increase in interest rates is the high unemployment rate. The January unemployment rate is at 7.9 percent, up from 7.8 percent in December.

When the unemployment rate falls to 6.5 percent the fed will cut back on their stimulus programs and might start increasing the fed funds rate. A higher fed funds rate will mean higher interest rates on deposit accounts. Until then we recommend staying in shorter term certificates of deposit, savings accounts or money market accounts. That way you will be in a good position to ride interest rates higher.
Author: Monica Harris
February 1st, 2013