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Fed Rate Hikes and Bank Rates - Expectations?


The Federal Reserve is expected to raise the federal funds rate by 0.25% on Tuesday. But as this article explains, what the Fed does next year is questionable. Most economists consider it likely that the Fed will raise the rate again in its next meeting on January 31st. However, for the meeting after that (March 28th), there's much more uncertainty. The article goes through all of the economic factors that will influence this decision.

The Fed funds rate doesn't directly cause the banks to increase their savings account rates, but it does have influence as does competition among the banks. As we have seen this year, the Fed funds rate doesn't have a big influence on long-term interest rates like those on 5-year CDs. The best explanation that I've found on influences of short- and long-term interest rates is from this Franklin Templeton interest rate FAQ. Here's an excerpt:

How are short- and long-term interest rates different?

The Federal Reserve Board controls the federal funds rate. The Federal Reserve Board (Fed) has the power to raise or lower the federal funds target rate (Fed funds rate), which in turn influences the market for shorter-term securities. The Fed funds rate is the rate banks charge other banks for overnight loans. The Fed may raise the rate to keep inflation in check or lower it to stimulate the economy.

Long-term rates are market driven. Long-term interest rates, as represented by yields of the 10-year or 30-year Treasury bond, tend to move in anticipation of changes in the economy and inflation.

Which bank will be the first to respond? Perhaps GMAC Bank decided to beat EmigrantDirect by making a 0.20% increase yesterday. If EmigrantDirect wants to be on top, we should expect another 0.50% increase. Here's a look at the history of savings account rate changes by a few banks within a week after the last two Fed funds rate hikes.

Nov 1st Fed funds rate hike:
  • Nov 3rd, ING Direct +0.10%
  • Nov 4th, HSBC +0.25%
  • Nov 5th, GMAC Bank +0.25%

Sept 20th Fed funds rate hike:
  • Sept 20th, EmigrantDirect +0.50%
  • Sept 23rd, ING Direct +0.10%
  • Sept 26th, Presidential Bank +0.25%
  • Sept 27th, VirtualBank +0.15%