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FOMC Keeps “Considerable Time” Language on Fed Funds Rate

The Federal Open Market Committee wrapped up their two day meeting yesterday on economic policy. Their statement released right after the meeting showed they didn't change the "considerable time" language on keeping the federal funds rate at near zero percent. Many Fed watchers believe they would drop the phrase which would point to interest rates moving higher sooner than expected.

As a result of keeping the phrase, the expected timeline for increasing the fed funds rate remains sometime in mid 2015. What did change in this meeting is the Fed's forecasts on where the fed funds rate will be in the future. Fed officials raised their median estimate for the federal funds rate at the end of 2015 to 1.375 percent, compared with 1.125 percent in June.

If the fed funds rate increases to 1.375 percent by the end of 2015 we expect 1 year CD rates to move towards 2.50 percent. Savings rates and money market rates will also increase above 2.00 percent. The last time average 1 year CD rates, savings rates and money market were above 2.00 percent was over 5 year ago.

Interest rates move higher in tandem which means higher mortgage rates and higher auto loan rates are also on the way. While mortgage rates are not tied directly to the fed funds rate, they nonetheless will move higher because of stronger growth in the coming years. By the end of 2015, average 30 year mortgage rates will be above 5.00 percent. 30 year mortgage rates today are averaging 4.22 percent.

Interest rates will be moving higher longer term as well. Fed officials forecast the fed funds rate to be at 3.75 percent by the end of 2017. A fed funds rate at 3.75 percent would send 1 year bank CD rates towards 5.00 percent. Savings rates and money market rates will also be around 5.00 percent.

Since interest rates are moving higher in the coming years you should stay invested in shorter term certificates of deposit, savings accounts or money market accounts. That way you can take advantage of higher rates right away. The opposite is true for mortgage rates and auto loan rates. You want to lock your mortgage loan or auto loan right now before rates move higher.

You can view the Fed Chairperson's (Jent Yellen) press conference on economic policy below:
Author: Brian McKay
September 20th, 2014