Fed Just Locked In Low Rates For Savers
Summary
- Surveys suggest savers expect higher rates.
- The Fed just dashed their hopes.
- Real return on savings is likely to stay low for a long time.
NY Fed survey of consumer expectations (Survey of Consumer Expectations - FEDERAL RESERVE BANK of NEW YORK) shows more than one quarter of respondents believe savings rates will be higher one year from now.
The interest rate on savings often moves with the Fed Funds Rate.
The Fed just announced that we shouldn’t expect to see an increase in either for a long time.
So, these survey respondents are likely to be disappointed.
Moreover, if the Fed’s projection for 1.7% PCE inflation in 2021 is accurate, these paltry nominal savings rates of 0.05% will imply -1.65% in real terms.
Going beyond next year, the Fed expects to keep rates at/near the zero lower bound. Moreover, the Fed is willing to let inflation rise above it’s 2% target. As I wrote here (Fed Doesn't Expect To Hit Inflation Goals Until After 2023 - Mike Aguilar), that "higher" inflation isn’t expected to happen until sometime after 2023. When it does occur, the real rate on savings accounts could easily be as low as -2% or -3%.
Saving for retirement just got more difficult.
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