Market expectations as we began 2024 were that the Fed would lower interest rates several times this year (beginning early in the year).

Instead, inflation measures for January and February were elevated and the Fed has maintained the Fed funds rate at a 5.25% to 5.50% target. The most recent CPI indicators may show some progress on curbing inflation, but it much too early to say that we are heading back towards Jerome Powell 2% inflation target.   Meanwhile, but the economy has performed exceptionally well through the beginning of the year with the Dow crossing 40,000. Most economists agree that the economy has adjusted surprisingly well from a low interest rate era to a higher interest rate one.

Chase CEO and Tufts alumnus Jamie Dimon correctly pointed out to Bloomberg last week that significant inflationary forces remain. These include the restructuring of trade, infrastructure requirements of the green economy, remilitarization of the world and fiscal deficits. Dimon, in fact, thinks it is a 50-50 question of whether the Federal Reserve's next move is higher or lower. (The video of Dimon's comments is here.)

Against that backdrop, we really need to ask why the Fed would act now or anytime soon (presumably in September) to cut rates?

It strikes me that there are three realities that could - independently or in some combination - cause the Fed to cut rates before the end of the year.

First, the Fed could see data indicating that the US economy is slowing and act proactively to lower rates to try to extend the economic cycle.   There however is nothing in the data today suggesting any sort of slowing of the economy.

Second, the Fed could lower rates in response to a banking crisis, presumably one that results from high rates causing a cascading effect in commercial real estate resulting in many regional banks becoming illiquid. Jerome Powell, however, has been asked in press conferences whether this would cause a crisis that the Fed might respond to and has indicated that it might not, and the Fed let the Treasury contain the Silicon Valley Bank failure in 2023.

Third, there could be political influences ahead of the election that the Fed would be responsive to.  It however is starting to seem unlikely that the Biden administration would try to encourage a Fed move before the election as polls show that voters are not crediting him with the strong economy but that are blaming him for inflation. Were they however to call for lower rates, Powell and the Fed could be prompted to act, especially as Trump is also calling for lower rates now. Powell did lower rates for no reason after Trump jawboned him into it in July 2019.

Unless you believe that one, two or all three of the above are likely to materialize soon, it might be best stay in savings for now.

Compare savings rates here.

I speak with lots of people from many walks of life about the US banking system, about the safety of banks and deposit protection.  

Virtually everyone is generally familiar with FDIC insurance. Federal Deposit Insurance Corp. (FDIC), of course, is an independent agency of the U.S. government that protects depositors against loss of their deposits if their bank or thrift institution fails. The FDIC is backed by the full faith and credit of the U.S. government. All federal credit unions and most state-chartered credit unions are covered by the National Credit Union Share Insurance Fund (NCUSIF) which is operated and managed by the NCUA and operates very similarly.

In spite of the familiarity with the FDIC, there are some very common misperceptions.  Let me address these here.

1. The most dangerous misperceptions is that FDIC insurance covers all types of financial institutions and products. FDIC insurance only covers bank deposits such as savings accounts, checking accounts, and certificates of deposit (CDs). To be clear, it does not cover investments like stocks, bonds, or mutual funds whatsoever.  It also does not cover insurance policies, annuities, or other financial products that may be sold be a bank, even if the underlying policy is issued by that bank or some other FDIC-insured bank. When you purchase a bank's stock in any online broker, your investment is not covered by either that bank's FDIC insurance or the broker's SIPC insurance.

2. Another misperceptions is that FDIC insurance provides unlimited coverage for deposits. In reality, the standard deposit insurance amount is $250,000 per depositor, per insured bank, for each account ownership category. There was some confusion that arose in 2023 as a result of the full bailout of depositors in Silicon Valley Bank and Signature Bank and subsequent comments made by Treasury officials that still causes many to believe that FDIC insurance is unlimited.   Unless and until there is an act of Congress raising the limit above $250,000 per ownership category, the limit remains at $250,000.

3.  When the FDIC and NCUA refer to insurance to $250,000 in each ownership category, some depositors misunderstand what an ownership category is.  As explained here, "ownership categories" are individual accounts, joint accounts, retirement accounts, trust accounts, etc. and each of those categories may be separately insured up to the limit.  "Ownership categories" does not refer to number of accounts or types of products. If an individual has a $200,000 savings account, a $200,000 checking account and a $200,000 CD, he or she is well in excess of the $250,000 limit.   If a couple has those same three products entirely in joint accounts, they are still in excess of their $500,000 limit.

4. All Institutions offering savings and CD products are not insured by the FDIC.  Wealthfront, Betterment, Robinhood and Raisin are not FDIC insured banks, even though these banks may be opening accounts in your name at FDIC institutions.  The outfits fishing on Facebook, Twitter and elsehwere are not FDIC insured banks and probably are not opening accounts in your name at FDIC institutions.  It is essential to verify whether a bank is FDIC-insured before depositing funds. 

6. If you suffer losses from fraud, theft, or unauthorized transactions, you are not covered under FDIC (or NCUA) insurance which only covers the event of a bank failure. These issues may covered by the banks own policies or by state or federal consumer protection laws.

7. Some individuals mistakenly believe that FDIC insurance covers their deposits in foreign banks or deposits in foreign currencies. FDIC insurance only applies to deposits held in banks within the United States and its territories.  While it would apply to a foreign currency account at, say, Everbank, it does not protect the depositor from losses due to foreign currency fluctuations.

It is crucial for individuals to understand the specific coverage and limits provided by FDIC and NCUA insurance and to always err on the side of caution when not sure.

The FDIC has implemented new coverage rules that take effect today and only affect trusts accounts that have over $250,000 deposited at a single bank.

FDIC rules had previously permitted a single trust account (such as a payable on death account, revocable trust or irrevocable trust) to have virtually infinite number of beneficiaries, with each beneficiary treated as separately insured and covered to $250,000.

While the new rules do not limited the number of beneficiaries in a trust account, the total aggregate coverage of the trust account, regardless of whether the money is allocated to savings or CDs, is now limited to $1.25 million.

Learn more about FDIC coverage here.