Fed Meeting Preview and Deposit Rate Forecast - Oct 25, 2023
With the next FOMC meeting just a week away, it’s time for another Fed summary with a preview of what to expect. The two-day meeting is scheduled to start on Tuesday, October 31st, with the statement released at 2:00pm EDT on Wednesday, November 1st. At 2:30pm, Fed Chair Powell’s post-meeting press conference will take place. This meeting will not include a new release of the Summary of Economic Projections (SEP).
There are no longer any expectations for a Fed rate hike next week. In speeches last week, Fed Chair Powell and other Fed officials signaled that the Fed will extend its interest-rate pause. As described in this WSJ piece:
Federal Reserve Chair Jerome Powell suggested the run-up in long-term Treasury yields could allow the central bank to suspend a historic run of interest-rate increases so long as recent progress on inflation continues.
Ironically, the rise in long-dated Treasury yields in the past two months has contributed to the Fed’s decision to hold its benchmark rate steady.
The “progress on inflation” can be seen in the Fed’s preferred inflation gauge, core PCE. The year-over-year core PCE has fallen from 4.7% in May, to 4.3% in July, and to 3.9% in August. September PCE is scheduled to be released on Friday, and the forecast is for core PCE to fall again to 3.7%.
The economy’s strength has surprised the economists, and that could prevent us from seeing continued progress on inflation. If the progress on inflation stalls or reverses, the Fed has signaled that it could return to rate hikes. That may explain why the Fed Funds Futures market is pricing in the highest odds of a rate hike to be at the Fed’s January 30-31 meeting.
Treasury Yields
From the last Fed meeting to yesterday, the yields of short-dated Treasurys have changed little, while long-dated yields have increased substantially. The yields of 1-month, 3-month and 6-month Treasury bills had increases of 4, 2, and 6 bps, respectively. The 1-year and 2-year Treasury yields had small declines of 6 and 10 bps, respectively. Large yield gains have occurred for durations of five years and above. The 5-year, 7-year and 10-year Treasury yields had increases of 30, 40, and 48 bps, respectively.
This rise in long-dated Treasury yields has been affecting the rates of brokered CDs in the last month. The impact on direct CDs has been slow, as a few banks and credit unions have been slowly increasing their long-term CD rates.
In addition to the “higher for longer” change at the Fed, the rise in Treasury bond issuance driven by rising U.S. debt is likely a factor pushing up the long-dated Treasury yields. If that is the primary factor pushing up yields, the higher long-dated yields may last for quite some time.
- Sep 20 (after last mtg) → Oct 24
- 1-mo: 5.53% → 5.57%, up 4 bps
- 3-mo: 5.56% → 5.58%, up 2 bps
- 6-mo: 5.51% → 5.57%, up 6 bps
- 1-yr: 5.47% → 5.41%, down 6 bps
- 2-yr: 5.12% → 5.02%, down 10 bps
- 3-yr: 4.82% → 4.91%, up 9 bps
- 5-yr: 4.52% → 4.82%, up 30 bps
- 7-yr: 4.46% → 4.86%, up 40 bps
- 10-yr: 4.35% → 4.83%, up 48 bps
- 30-yr: 4.40% → 4.96%, up 56 bp
The above yields are based on Daily Treasury Par Yield Curve Rates.
Odds of Fed Rate Hikes and Cuts
I now have two sections of odds. The first section just includes the odds of Fed rate hikes. The second section includes just the odds of Fed rate cuts.
The odds of rate hikes have fallen in the last week, and there is now zero odds of a rate hike next week.
The odds of a rate hike increase for both the December and January meeting. They peak at just under 40% at the January meeting.
By June, the odds that the target federal funds rate will be higher than it is today is just 13.3%. The odds that the target rate will be lower than it is today is just over 52%.
By December, the odds that the target rate will be lower than it is today is 94.5%. The odds that it’ll be at least 75 bps lower is 56.0%.
So in general, the odds suggest that the Fed is done hiking and won’t do its first rate cut until June. However, there remains significant odds that there will be at least one more rate hike by January. It’ll depend on how the economy and inflation trend over the next three months.
Odds of Fed Rate Hikes:
Nov 1, 2023 - up by at least
- 25 bps: 0.0%, down from 6.6% last week
Dec 13, 2023 - up by at least:
- 25 bps: 29.6%, down from 39.2% last week
- 50 bps: 0.0%, down from 2.3% last week
Jan 31, 2024 - up by at least:
- 25 bps: 39.7%, down from 48.0% last week
- 50 bps: 4.3%, down from 7.6% last week
Mar 20, 2024 - up by at least:
- 25 bps: 34.0%, down from 42.4% last week
- 50 bps: 3.6%, down from 6.6% last week
Jun 12, 2024 - up by at least:
- 25 bps: 13.3%, down from 20.3% last week
- 50 bps: 1.2%, down from 2.8% last week
Dec 18, 2024 - up by at least:
- 25 bps: 0.9%, down by 2.5% last week
- 50 bps: 0.1%, down from 0.3% last week
Odds of Fed Rate Cuts:
Nov 1, 2023 - down by at least
- 25 bps: 0.8%, up from 0.0% last week
Dec 13, 2023 - down by at least:
- 25 bps: 0.5%, up from 0.0% last week
Jan 31, 2024 - down by at least:
- 25 bps: 0.5%, up from 0.0% last week
Mar 20, 2024 - down by at least:
- 25 bps: 10.1%, up from 7.3% last week
- 50 bps: 0.1%, up from 0.0% last week
Jun 12, 2024 - down by at least:
- 25 bps: 52.1%, up from 42.0% last week
- 50 bps: 16.1%, up from 11.0% last week
- 75 bps: 1.7%, up from 1.0% last week
Dec 18, 2024 - down by at least:
- 25 bps: 94.5%, up from 88.4% last week
- 50 bps: 80.7%, up from 67.9% last week
- 75 bps: 56.0%, up from 40.3% last week
- 100 bps: 28.5%, up from 17.0% last week
The above odds are based on the CME FedWatch Tool.
Future Deposit Rates
It has now been about three months since the Fed’s July 26th rate hike, and the deposit rates at the major online banks have continued to disappoint. Their online savings account rates and short-term CD rates are well below the target federal funds rate. The major online banks have also been slow to raise their long-term CD rates as yields on Treasury notes have risen in the last three months.
The deposit strategy of the major online banks appears to be to remain close to their primary online bank competitors while they wait for the Fed to cut rates. We have seen the occasional short-term CD with a somewhat competitive rate. Recent examples include the 12-month CDs at Barclays and BMO Alto (5.50% APY), the 16-month CD at Synchrony Bank (5.40% APY), the 10-month CD at Capital One (5.30% APY), the 8-month Select CD at Ally Bank (5.25% APY), and the 12-month High-Yield CD at Marcus by Goldman Sachs (5.20% APY).
In the last three months, the major online savings accounts had few gains. At most, the gains were similar to the 25-bp July Fed rate hike. There’s no indication that they intend to move their savings account rates near the target federal funds rate. Below are examples of how yields of six of the major online savings accounts have increased since July 1st:
Online Savings Account APY changes from July 1st to Today
- Ally Bank: 4.00% → 4.25%
- American Express National Bank: 4.00% → 4.30%
- Barclays: 4.15% → 4.35%
- Discover Bank: 4.15% → 4.30%
- Marcus by Goldman Sachs: 4.15% → 4.40%
- Synchrony Bank: 4.30% → 4.75%
Even though long-dated Treasury yields have risen significantly since July 1st, most of the major online banks have kept their 5-year CD rates unchanged. The 5-year Treasury yield has risen from 4.13% to 4.82%, and the 10-year Treasury yield has risen from 3.81% to 4.83%. Below are examples of how yields of six 5-year CDs have increased since July 1st:
5-Year CD APY changes from July 1st to Today
- Ally Bank: 4.10% → 4.10%
- Barclays: 4.35% → 4.50%
- Capital One: 4.10% → 4.10%
- Discover Bank: 4.00% → 4.00%
- Marcus by Goldman Sachs: 3.80% → 4.10%
- Synchrony Bank: 4.00% → 4.00%
Only two of the six major online banks have increased their 5-year CD rates since July 1st. Barclays increased its 5-year CD rate by 15 bps to 4.50% APY, and Marcus by Goldman Sachs just recently increased its 5-year CD rate by 30 bps to 4.10% APY. The yields of all six 5-year CDs are well under today’s 5-year Treasury yield.
Like the major online banks, major credit unions like PenFed and Navy Federal have been offering disappointing CD rates. PenFed and Navy Federal have long histories of offering very competitive long-term CD rates, but their CD rates have been disappointing in this rate cycle. PenFed’s 5-year CD rate is now only 4.00% APY, and Navy Federal’s 5-year Jumbo CD rate is now only 4.05% APY. PenFed has a history of offering top long-term CD rates in December and January. Perhaps we’ll see a return of their great CD rates later this year, but I’m not holding my breath.
The rising long-dated Treasury yields have been impacting brokered CD rates. Long-term brokered CD rates have risen in the last few months. Below are examples of how top 3-, 4- and 5-year brokered CD rates have risen since July 1st:
Top brokered CD rate changes from July 1st to Today
- 3-year brokered CD: 4.90% → 5.20%
- 4-year brokered CD: 4.65% → 5.10%
- 5-year brokered CD: 4.50% → 5.05%
Fortunately, the major online banks and credit unions have a lot of competition. Several of the small and new online banks are offering online savings accounts with yields over 5%. The highest rate of an online savings account is now 5.40% APY at Popular Direct. The highest CD rate from an online bank is 5.80% APY (18-month CD from Seattle Bank), and the highest CD rate from an easy-membership-requirement credit union is 6.00% APY (12-17 month CD from Credit Human).
A few of the small online banks and credit unions have been modestly increasing their long-term CD rates, but even their rates are disappointing. Currently, the highest 5-year CD rate at an online bank is 4.85% APY at Merrick Bank. The highest 5-year rate at an easy-membership-requirement credit union is 5.00% APY at Farmers Insurance Federal Credit Union.
If future federal funds rates play out as the market expects with no future Fed rate hikes, we may see little change to online savings account and short-term CD rates for the next few months. Competition may force a few online banks to raise their rates, but I doubt we’ll see any widespread rate hikes.
If the long-dated Treasury yields keep rising or at least remain close to their current levels, it seems likely that we’ll see some higher rates on direct long-term CDs. Banks and credit unions have been preferring to attract and maintain deposits with short-term CD Specials rather than long-term Specials. So we may not see any long-term CD Specials, but the slow rise of the standard long-term CD rates may continue.
I mentioned the following in my last Fed meeting preview, and it bears repeating. In past rate hike cycles, there’s always pressure to avoid long-term CDs in favor of short-term CDs and online savings accounts. The inverted yield curve only adds to this pressure. It’s hard to justify locking into a long-term CD which may have a rate that’s lower than some online savings accounts. However, history has shown the rate lock of long-term CDs has proven to be useful when the Fed’s rate hiking cycle is at or near its end. Of course, it might be different this time, but you may still want to hedge your bets.
Comments
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Post Publication Edits:
10/25/23: Corrected top online bank CD rate (from Seattle Bank, not Finworth).
LADDERED BECAUSE I KNEW IT DIDNT MATTER!
Surely I must've heard of this somewhere before?
set it, and forget it!
This 60/40 portfolio made me and many others a cr*pload of money over the last few decades - but the article points out that starting in 2021, the next few years may look more like 1966-1981 than 1982-2020 when 60/40 dominated. Has to do largely with - you guessed it. High inflation combined with high interest rates, in 1966-1981 and now also in 2022-?.
https://www.cnbc.com/2023/10/26/european-central-bank-holds-interest-rates-steady-after-10-consecuti...
Wells Fargo is offering a brokered (new issue) five year CD for 5.05%, NONcallable.
I saw this available on Vanguard and Schwab (my only brokerage accounts).
Probably need to move today before this offer closes.
This CD is available in units as small as $1,000. Much more user friendly than Treasuries (or, god forbid, a credit union).
The federal government is the supreme leader of the Ponzi. I'd rather go with the boss.
after market Treasuries are far more user friendly than after market CDs I've found.
America keeps spending and charging and paying 30% interest and it just does not stop That concerns me as well. So many , so many, people are financially dense. Discretionary spending and accepting 30% in your mind, can you just imagine people doing that?
Again though I believe rates go up a pinch or just hold. The next election though I plan the be in a lot of bonds if it looks like a Trump reelection. He's already signaled he will put heat on Powell to bring the rates down, as creditors are more important to him than savers.
... And I'd like to thank each and every one of them!
Because of them I haven't paid for a flight or hotel room in decades.
The tens of thousands of $ from credit card bonuses and 0% loans is also greatly appreciated!
Stocks are likely to be a much better choice in preparation for that scenario.
"as creditors are more important to him than savers."
Can't agree with you on the motivation to bring rates down. It's not a battle between creditors and savers it's a battle between economic solvency and insolvency. The reason rates are so high is because the country is living on borrowed money and borrowed time. The debt is unsustainable and high rates make rapid economic growth impossible. We are on the road to a third world economy. The only way out of the debt death spiral is to grow GDP so the debt to GDP ratio isn't an economic death sentence. Bonds and CDs will be worthless if this doesn't happen and time is running out.
But the rates are not historically high at all. We have fattened up on "free money" for 13 years and are lost now that rates are returning to historically average. My mortgage rate was 9%. I survived.
Frump has flat out stated that rates are "hurting people" and his goal is to bring them down. That's his whole economic plan.
Rates had been low until very recently and look at the national debt. Imagine if they weren't. Bidenomics and a Frump presidency just wrecked our bottom line. Not interest rates.
But the debt is.
The fed had rates at zero for how many years? They lowered the rates to get the economy moving, lower rates push people to spend so they go into debt because debt is cheap, also lower rates make it easier for the government to take on debt. I was concerned about the debt a few years ago but other people weren't because the interest rate was low so it didn't bother them but I said to myself, what happens when rates go up.... now people are worried.
The fed left rates too low for too long and didn't see the inflation coming, now they are trying to slow the economy by raising rates... in my humble opinion rates should never be at zero, and buy our own bonds... ridiculous, again imo.
Sometimes, ya know, capitalism blows. The only historical tool we have to combat inflation is interest rates, and it's just not working. This auto contract is going to have consequences. Just watch how it plays out. Inflation. The fine art of ****ing you so I can have a better life.
So many in government would like you to think but it's not so. Lower taxes, less government spending and regulation is the right way to combat inflation because unlike central bank rate increases it doesn't require trying to fix the economy by destroying it first.
Tran | 48 minutes ago | Comment #16
The 10 year will break out past 4.5%? Then we will see widespread 5% plus 60 month non -callable CD's? Somebody is smoking to much weed!
Btw, a lot of people predicting 7% or higher so that makes me take a more contrarian view, at least shorter term anyways.
https://www.businessinsider.com/rich-people-tax-evasion-owe-billions-returns-2023-10
I had 100K mature today and I just rolled it into 3 separate bills for 3 month 6 month and 9 month all basically paying the same rate. I'd rather have it in the market but I want to see how the Israel-Hamas battle plays out to see if our military is brought into the conflict in a larger scale, which could blow up everything, or not. I may lose 2 bps or so buying them from a broker like E*Trade, but they are easy to unload just forfeiting future interest. Basically what I am saying is I am not going to lock in my savings anywhere right now and i'll basically just watch.
Doesn't keep up with inflation but it's the only way the wife and I sleep at night.
I like it that they are easy to unload at E*Trade for the most part only losing some future interest. It's a shame ETtrade doesnt offer a savings account within the IRA. Only a premium savings account paying 4.25% outside the IRA. So it's invest in anything or get 0 interest in the IRA.
I'm playing the waiting game as you are. Millions of us are as the stats say there is an "astronomical" amount of cash on the sidelines.