Ahead of this month's meeting of the Federal Reserve, at least a couple of variations on the theme of transition are on the agenda.
First, the Senate is expected to confirm current Vice Chair Janet Yellen for the central bank's top job, meaning she'll likely be ready to take the post as Chairman Ben Bernanke steps away at the end of January.
Yellen was approved by the Senate Banking Committee last month, with support of some Republicans on the panel. Bernanke is expected to preside at his final news conference as chairman this month.
Secondly, growing pressure is on the Fed to begin scaling back asset purchases. The November employment report provided a fresh indication that the job market is healing. Unemployment fell to 7 percent, closer yet to the Fed's own stated threshold of 6.5 percent. If the Fed actually begins extracting some of its extraordinary measures aimed at boosting the economy, interest rates are eventually expected to rise. "You are going to see it in mortgage rates, especially the 30-year fixed and 15-year fixed-rate mortgages," says Scott Anderson, chief economist at Bank of the West.
Unfortunately, not much help is on the horizon for savers. "You are probably not going to see it in your bank accounts anytime soon, " Anderson says. "The deposit rates are still going to remain at zero because the Fed is committed to keeping those short-term rates near zero for a considerable period of time."
When they were last surveyed, members of the Federal Open Market Committee indicated they didn't expect an increase in the benchmark rate anytime soon. "We do not think the (federal) funds rate is going to be raised until late 2015 or early 2016. So it is going to be a kind of a weird environment, where the cost of getting a loan and financing a car might go up, but your deposit rates, if you are a saver, are not going to go anywhere," says Anderson.
The Fed's two-day meeting begins Dec. 17, with the chairman's news conference the following day.
Are you ready for rising interest rates?
Follow me on Twitter: @hamrickisms.
Change in the air at the Fed
With a new chair and a likely shift in strategy, the Federal Reserve is putting together a new playbook.
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From Bankrate.com, This is Your Money This Week.
We connect the dots between what's happening in the world and your wallet.
I'm Mark Hamrick reporting from Washington.
Change is in the air at the Federal Reserve and that in turn affects the finances of all of us.
With Chairman Ben Bernanke stepping away as the nation's top central banker, the transition in leadership is just one of the shifts we're expecting in the coming months.
What will it mean, if the Fed does scale back on monthly asset purchases? Is there any chance that miserly savings rates will begin to rise?
And Bankrate's Doug Whiteman gives us a lesson on health insurance options for college students.
All of that and more coming up on Your Money This Week.
With the goal of giving the economy a much needed push, the Federal Reserve has kept benchmark interest rates at record lows for years now. And now, with the job market continuing to heal, the Fed appears poised to begin pulling back on the pace of monthly asset purchases. Is the end of so-called quantitative easing in sight?
In my conversation with Bank of the West chief economist Scott Anderson, I asked whether there's a risk that the road ahead could be a bit rocky.
Scott Anderson: Well, it has never been tried before. The Fed's balance sheet is approaching four trillion and the scale of these assets and the amount that will likely have to be drained from excess reserves at some point in the expansion is really impressive. The Fed thinks that they have the tools to do that. They have been thinking about this for quite some time, but it has never been tried. So I think it will be a little bit of a trial and error process. And the risk and concern is that they will be a little bit behind the curve in terms of bringing the liquidity, and you could see some inflation pressures, monetary fuel inflation pressures develop from this, as the central banks of not just the Fed but other central banks around the world have been pumping liquidity into their economies.
Mark Hamrick: Is that more of a long-term concern or is that your concern in the short term as well in terms of inflation pressures?
Scott Anderson: No. I think it is a little long-term, medium-term concern. When I look at our forecast for next year and consumer inflation, it is very tame, still somewhat below the Fed's target at 1.6 percent. So no real inflation pressures in our crystal ball over the near term. Here, in fact, inflation has actually been trending lower and that has gotten some on the F-1 seal [PH] concerned about the lower end of their inflation targets and actually led some to believe that maybe we should continue these asset purchases a little bit longer.
Mark Hamrick: So I have a friend who used to talk about Colucci [PH] on the coal truck in New York City when he was trying to figure out how things boil down to the average person. If the Fed does indeed scale back on asset purchases, as we all seem to expect now, how will that affect Colucci [PH] on the coal truck?
Scott Anderson: [Laughter] Well, the real thing is, the interest rates are going to go higher, so you are going to see it in mortgage rates, especially the 30-year fixed and 15-year fixed-rate mortgages. You are probably not going to see it in your bank accounts any time soon. The deposit rates are still going to remain at zero because the Fed is committed to keeping those short-term rates near zero for a considerable period of time. We do not think the Fed fund's rate is going to be raised until late 2015 or early 2016. So it is going to be a kind of a weird environment where the cost of getting a loan and financing a car might go up, but your deposit rates, if you are a saver, are not going to go anywhere.
Mark Hamrick: Yeah. And people have obviously been complaining about that for some time. And now it looks like the broadest part of this transition, Scott, will fall to Janet Yellen as Ben Bernanke steps away, we believe, at the end of January. Do those personalities matter much?
Scott Anderson: Yeah. Their styles certainly matter. I think obviously they are not the only ones on the committee and they have to get a majority of the members to go along with their policies. But Janet Yellen has been at the table throughout these conversations, so I do not expect to see a very radical change in policy with Yellen's takeover. She is known as a dove and she is more concerned, probably, about the elevated unemployment rates than some on the committee. But the Fed has already signaled that they are willing to taper these asset purchases, and I think it is going to happen a little bit sooner than the market consensus. I think Bloomberg is still saying that they probably will not start the taper until March. I think it is going to be January. I think the numbers that we are seeing right now coming from employment, the ISEM survey suggests that the economy's momentum is still intact. The government shutdown was not as big of a deal for the economy and the labor market as some analysts thought, and that will probably push up the timetable when the Fed actually starts reducing their asset purchases.
Mark Hamrick: From time to time, we will hear either Janet Yellen or Ben Bernanke talk about how the Fed is monitoring what might termed as the possible unintended consequences of these extraordinary measures that the Fed has been engaged in, whether it is record low interest rates or the continued trillion dollars plus of asset purchases. Do you think the Fed to some degree intentionally underplays the concern that it has about that for fear of perhaps upsetting the financial markets, but at the same time, it does not want to act as if it is not paying attention.
Scott Anderson: [Laughter] Yeah. It is a little bit of a high-wire act for them. I do think that they do downplay some of the risks. They really have not been too aggressive in talking about the low inflation that we are seeing. Some members think the Fed should be a little more explicit in defending the lower amount on their inflation target. But I think they are monitoring financial markets. There are some that are worried about additional bubbles, financial instability that could occur around some of these policies. One thing that was interesting that came out of the last minutes was they are entertaining reducing interest rate on reserves as a way of trying to bolster loan growth. It is a very technical thing, but it could have wide-ranging implications for the money markets and for bank deposit rates. Even some big banks have threatened to actually charge depositors if the Fed actually goes ahead and does that. They would actually be charging you to hold their money. [Laughter] So those are things that are really off the charts in terms of what we see in terms of policy-making, monetary policy-making, in the past and it really puts us in uncharted waters.
Mark Hamrick: Well, all of that does reflect the fact that we are living in, to some degree, unprecedented and at least very interesting times and we appreciate having the ability to chat with very smart people like you, Scott, to explain it all. Thanks so much for your time, Scott.
Scott Anderson: Thank you, Mark. I appreciate it.
Scott Anderson. He's chief economist with Bank of the West. He spoke with us from his office in San Francisco.
Next up, Bankrate's Doug Whiteman. The financial challenges are tough enough for college students, what with the rising, already expensive cost of tuition.
What's a student to do when it comes to obtaining health insurance?
Reporter: Doug Whiteman
Computer? Check. Mini-fridge? Check. Here's one more that should be high on the list of college-student essentials: health insurance.
Students have several options for taking care of emergencies and other health needs while they're in school. Many colleges offer their own health plans, and the costs are be grouped with other student expenses such as tuition, so student loans can assist with the premiums. Or, thanks to the Affordable Care Act, a college kid could just stay covered on mom or dad's health insurance until the age of 26. But the family must check to see if the insurance company's network includes doctors near campus. The health care law also makes it possible for students to buy their own subsidized policy, or get a lower-cost, high-deductible "catastrophic" plan, or even qualify for Medicaid in states that are expanding the program.
For more on health insurance options for college students, visit Bankrate.com. I'm Doug Whiteman.
Finally, our look at this week in business history....
On Dec. 13, 1816, an important event in the evolution the nation's financial services industry. The Provident Institution for Savings, the first savings bank in the U.S. was chartered for operation in Boston. Through mergers, the bank's successors would eventually become part of Bank of America.
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For more on this and other personal finance issues, visit Bankrate.com. And you can follow us on Twitter @bankrate and I'm at @hamrickisms.
Thanks to Producer Lucas Wysocki, for his work in the studio.
I'm Mark Hamrick. From all of us here at Bankrate, here's hoping you have a great week.