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Bank rates to stay low

By Marcie Geffner ·
Wednesday, June 22, 2011
Posted: 9 am ET

Consumers who want to earn more interest on their bank savings and checking accounts might have a long wait, judging by Federal Reserve Chairman Ben Bernanke's remarks earlier this month at a conference in Atlanta.

Bernanke acknowledged the moderate pace of the U.S. economic recovery, rise in inflation, slowed momentum in the labor market and elevated unemployment. All of that argues against any change in the Fed's stance on interest rates.

Instead, the Federal Open Market Committee (FOMC) "continues to anticipate that economic conditions are likely to warrant exceptionally low levels for the Federal Funds Rate for an extended period," Bernanke said.

The FOMC also intends to go ahead with its plan to wrap up its purchases of $600 billion of Treasury securities by the end June and maintain its existing policy of reinvesting principal payments from its securities holdings. The purchases plan has been known as the second round of quantitative easing, or "QE2."

The plan is predicated on the Fed's expectations that inflation will moderate and commodity prices in particular will stabilize. It's against that backdrop of economic conditions and expectations that the Fed is basing its decision to stay the course on bank interest rates.

"Although it is moving in the right direction," Bernanke said, "the economy is still producing at levels well below its potential; consequently, accommodative monetary policies are still needed."

Of course, the Fed chairman never says anything without hedging his bets, and the same was true in these remarks, which included a caveat that rates could rise if inflation spiraled beyond food and fuel.

"If signs were to emerge that inflation was becoming more broadly based or that longer-term inflation expectations were becoming less well-anchored," Bernanke said, "the FOMC would respond as necessary."

Low rates are a boon for borrowers. But savers might well be dismayed at the reality that higher rates will come only with higher inflation, since that suggests any additional earnings will be consumed by higher costs.

Follow me on Twitter: @marciegeff

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