Savers would probably love to see the Fed reverse that trend, but with unemployment over 9 percent and the recovery still pretty sluggish, the Fed hasn't shown any willingness to move rates higher.
That's why it was really interesting that this month the European Central Bank elected to raise their equivalent to the federal funds rate, called the marginal lending facility, by a quarter percentage point, the first such increase since July 2008. Usually, the federal funds rate and the ECB's marginal lending facility rate are pretty highly correlated; that is, they move pretty closely in sync.
As you can see on the chart (at right), since 1999, ECB tends to lag the Fed, and never seems to cut its rates quite as aggressively, but the rate trends look pretty darn similar. So does an ECB rate hike foretell a similar move by the Fed, giving hope to CD investors everywhere that short-term CD rates won't be laughably low forever?
In a word, no. This rate hike represents a serious divergence between Fed policy and ECB policy, says Greg McBride, CFA, Bankrate's senior financial analyst, and it's not likely to be repeated here for some time:
I don't think the ECB has any bearing on the Fed right now. They are operating under fundamentally different schools of thought at present.
The ECB is focused on price stability to the risk of the economic recovery. The Fed is focused on the economic recovery to the risk of price stability. Each has dug in their respective heels accordingly.
Even now that the ECB has increased rates, the Fed seems undeterred despite the declining dollar, the subsequent increase in dollar-priced commodities and the resulting effect on inflation.
So there you have it. While savers in Europe will be getting some relief in the form of higher deposit rates, American savers will have to suffer lower CD rates for a while longer, it seems.
I think the Fed's commitment to easy monetary policy may be good news for the U.S. economy as a whole, which is growing at a faster clip than the euro zone's economy thanks in part to more expansionary monetary policy. But it's almost certainly bad news for CD investors and savers in general, because they'll continue to see rock-bottom deposit rates on short-term products as long as the Fed sticks to its expansionary guns.
What do you think? Should the Fed follow the ECB and hike rates?