3 Reasons Interest Rates Will Stay Near Zero Until 2015

By: Brian O’Connell

NEW YORK (BankingMyWay ) – With the economy bumping all at the bottom, desperately looking for liftoff, the Federal Reserve may have to shelve its plans to keep interest rates at rock bottom through 2014.

Instead, it apparently plans on extending those low rates to 2015, and that is bad news to bank investors.

Here’s why. The Federal Reserve basically calls the tune on bank interest rates. When it sets its rates low (via the money it lends to banks and financial institutions), everyone else, from banks to auto financing firms, follows along.

That can be good news if you’re buying a new truck, or a three-bedroom ranch, as rates are low and thus cheaper for consumers. Right now, the average 30-year fixed home mortgage rate is 3.735%, according to the BankingMyWay Weekly Mortgage Rate tracker .

Auto loans tell the same tale. They stand, on average, under 5%, according to the BMW Auto Loan Rate tracker .

But bank savers get the raw end of the deal.

When the Federal Reserve sets its interest rates low, banks do as well on investments such as certificates of deposit, money market accounts and even bank checking and savings accounts – which yield next to nothing these days and should continue doing so into 2015. Across the U.S. bank checking account rates are averaging under 1%, a paltry amount historically.

So why is the Federal Reserve keeping rates low for another three years. and punishing bank savers in the process?

Here are three reasons:

The futures market says so. Futures traders consider the low-rate extension into 2015 a forgone conclusion. If the money guys think so, it’s a good bet that a low-rate environment going forward is so. Last week, futures traders bet there was a 66% chance that the Federal Reserve would extend low rates past 2014. But in early August, before the Federal Reserve met to discuss fiscal policy, that number was 28%.

Economic sentiment is weak. Economists are gazing across the fiscal landscape and see nothing but weak growth and low inflation. The capper on the jug might have been last week’s unemployment number that suggests millions of Americans have given up and stopped looking for work. In a toxic economic environment, the Federal Reserve strives to keep rates low to induce looser credit and more business and consumer spending to give the economy some much-needed traction.

The bond market is setting in for a long period of low growth. Another reliable bellwether is the U.S. bond market, which forecasts low or slow progress for the U.S. economy going forward. Yields on 10-year Treasuries, a key indicator of economic progress, are weak and heading lower. A Bloomberg survey of economists released in August clocked in much lower than most Wall Street observers had thought, with target 10-year Treasury yields ending the year at 1.65%, and ending 2013 at 2.38%, down from 1.9% and 2.7%, in the most recent Bloomberg survey.

Merge it all together and it’s no surprise that the Federal Reserve is apparently maintaining its strategy of low-interest rates all the way into 2015.

That’s not good news for the economy, and it’s worse news for bank investors.

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