The Federal Reserve just signaled that the financial world is not going back to normal, not yet anyway.

For those too young to remember the details of interest rates and money markets before the financial crisis and Great Recession a decade ago, the old normal was that interest-bearing investments paid a meaningful amount of interest.

The 10-year Treasury note is one of those famous benchmark-interest rates, and at the end of the last economic expansion in the summer of 2007, it had a yield of about 5 percent. This week it was closer to 2.4 percent.

Small savers are more likely to think about banks as a place to put their money, and certificate of deposit rates on offer don’t seem that enticing this week. The average rate was just over 1.5 percent for two-year CDs, according to, although where this financial website found rates that high was a mystery.

CDs rates published online at a handful of brand name Minnesota banks didn’t come close to that.

It’s true that earning 1.5 percent beats keeping money in a Folger’s coffee can in the backyard, but the real interest rate isn’t what the bank pays the saver for a $10,000 CD. What’s important is what the dollars buy when the CD matures, given that what things cost will probably increase in the two years that the money is put away.

To get the real rate of interest, subtract the inflation rate from the interest rate. In this example, at least, the calculation is simple, since inflation over the last 12 months was also about 1.5 percent, according to the most recent figure from the U.S. Bureau of Labor Statistics. If that inflation rate holds over the next two years, no one will need to reach for a calculator to see the real rate is about zero.

“At some point math matters,” said Bryce Doty, a senior vice president and senior portfolio manager with Sit Investment Associates in Minneapolis, who also finds this new normal very odd. “Dislocations like that can persist way beyond what would seem logical or reasonable. But at some point people require some kind of return after inflation.”

It’s not really fair to blame the Federal Reserve for two-year CDs with no real rate of return. The Fed had to step in to stabilize the economy during and after the financial crisis. And among the ways it did that was taking the benchmark short-term interest rate almost to zero by the end of 2008.

It stayed that way through December 2015. Only then did the Fed gradually start increasing. The idea, through a set of policies the Fed literally called normalization, was to somehow get back to business as usual.

In a nutshell, the job of the Fed through the usual ups and downs of economic cycles is to balance two goals that appear contradictory. One is to promote job growth to the point that so few people are looking that wages have to increase, while the other goal is price stability. That has meant an annual rate of inflation of only 2 percent.

Low interest rates certainly help fuel job growth, but keeping them too low for too long can lead to price inflation.

As the unemployment rate slowly and steadily declined from its 2009 high after the last recession, it made sense for the Federal Reserve to gently pull the foot off the accelerator and move its short-term interest rate up from near zero.

That thinking persisted from late 2015 all the way through last week.

Then last week the Fed said it was standing pat and suggested there’d be no further increases this year and maybe only one next year. This was such a switch in thinking that it now seems possible that there’s a rate cut coming before there’s another boost in rates.

As it stands right now, the closely watched Fed funds rate is about 2.4 percent. It was twice that in 2007.

The main short-term interest rate wasn’t the only thing that the Fed wanted to normalize. By early 2015, after years of buying Treasury and federal-agency securities to help keep interest rates down, a monetary policy known as quantitative easing, the assets on the Fed’s balance sheet had swelled to $4.5 trillion.

The people who run the Fed knew holding trillions of dollars of securities was no more normal that a zero percent short-term interest rate, so beginning in the fall of 2017 the Fed has been working on slowly selling off pieces.

This had to be done gently, mostly because the Fed started with an asset pile of unprecedented size.

But now that process also seems basically on hold, as the Fed said it’s cutting the amount it’s selling monthly and then will stop come September.

It’s apparently normal for the Federal Reserve, about 10 years into an economic expansion, to have about $3.5 trillion of investments, or more than four times the assets it had in the summer just before the last recession.

So that’s the situation in March 2019. The balance sheet is still bloated, at least by historical terms. Interest rates still look awfully low to anybody who took out a home mortgage or ran a business before 2007. And the Fed seems to have concluded it’s now normal enough.

Lots of policy wonks have pointed out that this doesn’t leave the Fed as many good options when the next recession hits.

“I can see why the market is scratching its head,” Doty said, considering the Fed’s actions. “It’s going ‘Wow, I didn’t think [the economy] was that bad.’ ”

Doty is optimistic that the current thinking doesn’t last, and he’s giving the pause of normalization about six months before the process resumes.

On the other hand, maybe the market for savers and borrowers doesn’t get back to normal until enough savers look at a 1-percent CD rate offered at the bank and decide there just has to be a better place for their money. And that might take longer than six more months. 612-673-4302