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Keep your eye on the Fed

It's that time again. All eyes are riveted on what the Federal Reserve will or will not do with interest rates in the next few weeks.

Right now the odds favor an increase of at least one-quarter percent in the Fed's discount rate. Much depends on what shows up in the all-important monthly employment report, due out Aug. 2.

+ Signal No. 1: If the number of people who had jobs in July shoots up more than expected, Fed chairman Alan Greenspan could boost rates at the Fed's Open Market Committee meeting Aug. 20. Or he could do it sooner.

If he does raise rates, the financial markets, already behaving like spoiled children, will scream. After all, they're still reeling from a nosedive in technical stocks.

But first, know this: In every presidential election year since 1960, the Fed has artfully refrained from significantly raising rates within six months of the election, except once _ in 1980. Greenspan would rather fight off the mumps than change the numbers so close to Election Day. The move might be construed as political.

Philip Lavenson, economist for Prudential Securities, New York, told Bank Rate Monitor that if the figures show anything above 100,000 new jobs on non-farm payrolls, the Fed chieftain may have no choice but to raise rates.

Other expected data in the job report that could push rates higher: A sharp rise in average hourly earnings.

All that, of course, is against a backdrop of low inflation, which, until now, lots of folks believed was a sure sign Greenspan would leave well enough alone.

+ Signal No. 2: The gap probably will close somewhat between what you earn on Treasury yields and what banks pay you on CDs. Here's why:

Since February, treasuries have risen much faster than CDs. BRM surveys show that six-month CDs have increased only one-sixth of a percent, compared with more than a half-point rise in six-month Treasury bills. On five-year accounts, CDs have done better, but not well enough.

"Ever since we came out of the recession, bank deposits have been relatively high to loans, so there's been an effort to not encourage flow into CDs," said David Berry, research director at New York-based Keefe Bruyette and Woods. "But now banks are "loaned up,' and they're going to have to compete more aggressively for deposits by narrowing the (rate) gap between CDs and Treasuries."

On the other hand, he says, if banks turn to other sources to raise money, such as asset-backed securities, that could keep CD rates low relative to Treasuries.

Outlook: With loan demand still brisk, banks will entice you with slightly higher rates to get your CD business, regardless of what Greenspan does. The higher numbers will most likely be on long-term accounts such as five years.

LATEST RATE TREND: One countersignal is that BRM's ratio of savings rate increases to decreases is only a very weak 2-to-1. CD yields are still barely inching upward by only one- to three-hundredths of a percent a week. Mortgage rates, meanwhile, are declining slightly.

Robert K. Heady publishes Bank Rate Monitor, 100 Highest Yields and other financial newsletters from North Palm Beach.

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