Diligent savers or those individuals who hold cash for an emergency will not see much of a reprieve in yields even if the Federal Reserve raises interest rates several times in 2016.
The Fed will only make “modest” increases this year due to sluggish economic growth, low inflation and various geopolitical issues which will keep a “lid” on it, said Greg McBride, chief financial analyst for Bankrate, the North Palm Beach, Fla.-based financial content company. This dismal outlook, exacerbated by this frenzied market sell-off, does not bode well for consumers who are saving money in cash accounts for emergencies, down payments or large purchases, since any improvements to interest rates will be “hard to come by,” he said.
But though penny-pinchers who love to line their savings accounts may not benefit from this scenario, the prolonged low interest rate environment provides a distinct advantage for first-time home buyers since they remain at a historic low and consumers should also take advantage of lower and 0% rate offers from credit card issuers before the availability decreases.
Any moves the Fed makes in 2016 will be conducted “slowly,” and the central bank is not likely to raise rates more than three to four times or by 1% because the general market conditions do not support raising them rapidly, said James Kahn, a former vice president of the Federal Reserve Bank of New York and an economics professor at Yeshiva University in New York.
The potential for the Fed not to raise rates at its next meeting this month is high since the strategy is quite different from ten years ago when the Fed raised rates by 0.25% each time it met, he said.
“It would not surprise me if they did not raise rates this next time,” Kahn said. “Although I doubt they will cut rates in 2016, because that would require a substantial crisis to occur.”
While yields still remain historically low for savers, consumers can boost the amount of interest they receive by depositing their money in online banks, which tend to increase rates “faster” compared to their brick and mortar counterparts since they are “delivering roughly ten times more yield,” said Gary Zimmerman, CEO of MaxMyInterest, a New York-based company that maximizes cash balances for savers. Even among the online banks on the market, some of them will increase rates faster than others.
“These online savings accounts, which offer daily liquidity and the same FDIC insurance coverage as their brick and mortar peers, are providing roughly twice the yield of even a five-year CD at some of the largest banks,” he said.
The Fed’s previous actions means that consumers and the economy have grown accustomed to being “hooked on low rates,” said Andrew Carrillo, president of Barnett Capital Advisors, a Miami-based asset management firm.
“It can make sense to have a portfolio of short-term bonds to help you keep pace with inflation, but otherwise just keep your cash in low-yielding money markets,” he said.