Inflation
Interest on savings has not kept pace with inflation.
The Federal Reserve has kept interest rates extremely low in response to the 2007–2009 Great Recession and subsequent slow economic recovery. Since mid-2016 economic activity has been expanding at a moderate pace, and the labor market continues to strengthen. With the improvements in the economy, the Fed raised the federal funds target rate in December by a quarter point, from a range of 0.25–0.50 to 0.50–0.75. Looking ahead, the latest projections predict three more quarter-point increases in 2017. However, the Fed is data dependent, and the path of future rate increases is not locked in. The Fed’s decision to raise the federal-funds target rate in December marks the second increase in two years, after a decade of keeping interest rates at historic lows.
Low interest rates on conservative savings accounts have not kept pace with inflation. Since the Great Recession, personal income from interest on assets has increased at an average annual rate of 1.5 percent. Over the past two decades, interest income has increased at an average annual rate of 2 percent. In December, the yield on the one-year Treasury note was 0.8 percent. The national average interest rate on a one-year bank certificate of deposit, another traditionally low risk investment, was 0.5 percent in December. In comparison, inflation as measured by the year-over-year change in the Consumer Price Index was 1.7 percent in the latest month.
A decade of low interest rates has helped borrowers, on the other hand. Important consumer finance rates, such as mortgages and auto loans, are lower today compared with their 10-year averages. According to BankRate, the national average in December for a 30-year, fixed-rate mortgage was 3.6 percent, compared with a 10-year average of 4.1 percent. Today, the interest rate on a new auto loan is 4.3 percent, compared with a 10-year average of 5.7 percent. Lower interest rates have spurred growth in consumer credit. Both revolving and non-revolving consumer credit outstanding have grown 6 percent over the past year, faster than in recent years. Debt service and principal payments as a share of income are near all-time lows.
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1. Overview
2. Economy
3. Inflation
4. Policy
5. Investing
