Fed Funds Rate Discussion

Updated: January 21, 2009

NO LOWER TO GO - 0-.25%. President Obama's innauguration has come and gone and still no real change to the Fed Funds rate futures chart. As you can see from the charts below, the market's consensus seems to be that rates are staying at the 0-.25% range for the foreseeable future. The economy has flatlined.

The Fed statement that came out of the FOMC meeting where the reduction was announced said the following:

"The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time."

This pretty much takes away any drama for the moment. At some point we'll begin to speculate about when the Fed will begin to increase rates but we're not close to that point yet.

The Fed Funds Rate is a key indicator in determing the savings account rates, money markets rates, and CD rates that banks will pay. To see how the Fed Fund rate has impacted CD rates, savings rates, and money market rates, please see my Savings and CD Rate Analysis.

While the lower rates may be good for credit

(mortgage rates came down by almost one percentage point following the announcement) it's not great for savers. We've already seen banks cutting rates although on a positive note, the rates for savings accounts, and for some top CD terms have fallen by much less than the Fed cut. Will this last? Over time we suspect rates will continue to drift down although we expect they will never reach Fed Funds territory. As the CD and Savings analysis chart shows, banks have had to pay a premium above the Fed Funds rate for some time as competition for deposit dollars has become fierce. There's no indiciation this dynamic is going to end.

Let's hope that 2009 brings a better year for the economy and for savers and investors across the country and the world. Thanks for reading and Happy New Year!

FederalFundsRatePredictions