The outcome of the "Brexit" vote, in which UK voters elected to leave the EU, has likely dashed your hopes of getting higher interest rates on your savings this year.
Last year ended with some reasonably good news for savers. The Fed raised its benchmark federal funds rate in December, and planned a gradual return to normal interest rates, with regular hikes planned for 2016. Loan demand was continuing to grow at a reasonable rate, raising the possibility that banks might finally begin to work through the massive glut of deposits that had built up from the Great Recession's colossal flight to safety.
But slowing economic growth, a series of weak jobs reports and high volatility put that plan in jeopardy earlier this year as the Fed was forced to repeatedly postpone a subsequent rate increase. And now, it seems likely Brexit will decimate whatever hopes remained for savers in 2016, for 2 big reasons.
Reason 1: The Federal Reserve is much less likely to hike rates in the near future
Yields on liquid savings accounts tend to be strongly influenced by movements in the federal funds rate. While that wasn't exactly the case with the Fed hike in December, more Fed hikes this year would probably have started to budge savings yields upward. That doesn't look likely now.
The Fed released a statement this morning:
The Federal Reserve is carefully monitoring developments in global financial markets, in cooperation with other central banks, following the results of the U.K. referendum on membership in the European Union. The Federal Reserve is prepared to provide dollar liquidity through its existing swap lines with central banks, as necessary, to address pressures in global funding markets, which could have adverse implications for the U.S. economy.
These do not sound like the words of a central bank feeling confident about the state of the global economy. With the Fed solidly in damage-control mode now, the Fed's rate-setting Federal Open Market Committee may wait until the end of 2016 or beyond to raise rates again. The CME Group, which maintains a market in futures betting on Fed moves seems to reflect this. Yesterday, the probability, as predicted by that market, that the federal funds rate would remain unchanged through February 2017 was 41%. As of this writing, it's 80.7%.
Reason 2: A global flight to safety
With markets in turmoil following the announcement, plenty of investors are going to be heading for the hills, running to guaranteed investments, such as deposits. With other typical safe havens for global investors -- such as Germany -- a little too close to potential Brexit fallout for comfort, the U.S. is being seen as a safe haven.
In the hours since the outcome of the vote became clear, yields on safe investments have fallen drastically. The yield on 10-year Treasury bonds are the lowest they've been since July 2012, according to Bloomberg, and may go lower yet.
With that flight to safety, U.S. banks, which were already sitting on more than $11 trillion in total deposits, will now have even less incentive to offer higher rates to depositors.
Overall, this is a dark day for savers, who had reason at the beginning of the year to hope that things were going to return to normal.
What do you think? Do you expect Brexit to have a long-term affect on your savings yields?
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