Don’t expect bank interest rates to increase anytime soon

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Updated: February 18, 2012 4:48PM

Last week the Federal Reserve completed its first Open Market Committee meeting of 2012. This is the meeting at which Fed officials make decisions regarding interest rates and other policies concerning the economy.

In the Fed’s effort to be more transparent, Fed Chairman Ben Bernanke now hosts a news conference after each committee meeting.

Last week’s news conference revealed some extremely important guidance on what to expect regarding interest rates and the Fed’s outlook going forward. The information provided is something all Americans should be aware of.

The guidance from the Fed following the meeting clearly specified the central bank’s intention to hold short-term interest rates at the current rate of zero until at least the end of 2014.   

A world of prolonged zero interest rates is bound to be a strange world of imbalance and unintended consequences.  

One of the most significant imbalances created by the zero-interest-rate policy is it creates an environment that essentially punishes savers and makes retirement income planning extremely challenging.   

When asked about the hardship these polices cause for traditional bank savers, the Fed chairman for all practical purposes replied that the Fed was aware this policy was tough on savers and retirees, but ultimately this hardship was not a top concern.

To me the message from the Fed was very clear and that message is: If you have money and are simply storing it in the bank don’t expect to be rewarded; in this economy if you want financial gain you will need to be more than just a saver, you will need to be an investor; and in this economy only those who are able to accept at least some level of risk will be rewarded with gains.

Now whether this is fair is irrelevant. The truth of the matter is that our mega-indebted federal government simply could not function in an environment of higher interest rates and because of this we should expect the Fed to do everything it can to keep interest rates low as long as possible.

The guidance provided now may be that rates will stay low until 2014, but when we look at the similarly challenged Japanese economy we realize that rates can stay low for much longer.

Certainly FDIC-insured bank deposits have an important place in every financial house, and I know many readers have been waiting patiently for rates on these deposits to move higher.  

But reality now shows us that if you need your money in the bank to provide interest sufficient to meet your financial goals or if you need income from your savings for lifestyle purposes, it’s time to develop a new plan.

There are places where investors can achieve stable and predictable, yet higher income and returns. Some of these higher returns will be provided by dividends, some by innovative bond strategies, but the Fed told us last week it will be quite a while before attractive returns are provided by bank deposits.