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Fed Holds Steady - What Makes Sense for Deposit Account Strategies


Fed Holds Steady - What Makes Sense for Deposit Account Strategies

As widely expected, the Fed decided not to raise interest rates on Wednesday at the end of its fourth scheduled FOMC meeting of the year.

The main justification the Fed gave for holding steady is the weak unemployment numbers. The first sentence of the FOMC statement described this weakness:

the pace of improvement in the labor market has slowed

Another factor is inflation numbers. In the first paragraph of the statement, the description of inflation was changed from “remain low” to “decline”.

Market-based measures of inflation compensation declined

One thing that suggests a Fed rate hike won’t happen at upcoming meetings is the vote tally of the FOMC voting members. In the March and April meetings, Kansas City Fed President Esther George voted against the policy of holding rates steady. This time George voted with the majority. No one dissented today with the policy action of holding rates steady.

In addition to the FOMC statement, the Fed also released its economic projections which include members’ expectations about future federal funds rates. Those expectations are listed in the dot plot in figure 2. Comparing today’s dot plot with the March dot plot (when the last projections were released), you can see that the expectation levels for the federal funds rate have gone down. However, the median expectation for 2016 is still two quarter point rate hikes. The median expectation went down for 2017 from four hikes to three hikes. Likewise for 2018, the median expectation went down from four to three rate hikes.

Fed Chair Janet Yellen held a press conference after the statement release. One reporter asked her if the upcoming election is having any impact to the FOMC’s decision process. Fed Chair Yellen claimed that politics have no impact, and that their decisions are based totally on the data.

The Fed funds futures are showing a falling chance of a Fed rate hike later this year. The implied probability of a September rate hike has fallen from 35% to 26%, and for a December rate hike, it has fallen from 58% to 45%.

Deposit Account Strategies

I still think banks are unlikely to move much on deposit rates until we see another Fed rate hike. The December Fed rate hike didn’t help deposit rates. In fact, long-term CD rates are lower now than in December.

The next Fed rate hike should have more of a positive impact since it will indicate that the December rate hike wasn’t just a one-time event. Of course, the markets and the economy will have to remain stable after the rate hike. If the market and the economy experience turmoil like they did in January, banks will hold off on deposit rate hikes just like they did this year.

For savers, this is yet another example of how gradual rate hikes will be. Even if the economy improves as the Fed expects, rate hikes will still be gradual. As we have seen so many times, it doesn’t take much bad economic news for the Fed to make rate hikes even more gradual.

Based on what we’ve seen with the Fed, it may not be wise to give up on long-term CDs and CD ladders. If you are worried about being stuck in low-rate long-term CDs as rates rise, you may want to put more focus on 5-year CDs with mild early withdrawal penalties. Another option is a barbell CD ladder with internet savings accounts and/or reward checking accounts. I have more details on these strategies in my article, Deposit Account Predictions and Strategies for 2016.

Future FOMC Meetings

The next three FOMC meetings are scheduled for July 26-27, September 20-21 and November 1-2. The September meeting will include the summary of economic projections and a press conference by Fed Chair Yellen.

Anonymous   |     |   Comment #1
Best case scenario (probably only a fantasy) is quarter-point hikes in the Federal Funds Rate in both September and December.  More realistic is one increase in December again, though none at all is a distinct possibility.

I hate the Fed.
Anonymous   |     |   Comment #2
Not before the election
Anonymous   |     |   Comment #3
I dont understand how the Fed works. Is is possible Banks and Stock Market can manipulate conditions that the Fed looks at, to control the economy ?  I mean, that if they would want to pressure
change in regulations to benefit themselves, could they have that much power?
Anonymous   |     |   Comment #4
No conspiracy...just bet better than most!
ChasR   |     |   Comment #5
Over the last couple of years, I’ve attempted—when opportunities arose—to put maturing CD funds into a “two-step” ladder consisting of a 3-year CD and 5-year CD with identical balances and an average yield of about 2%.  I did stuff like a 1.71% APY 35-month USAlliance CD coupled with a 2.25% APY 5-year Barclays US CD.  I think those days are gone now (when will be see a 5-year Barclays CD at 2.25% again?)  as long-term Treasury yields get hammered by European and Japanese central bankers, and the Fed cherry-picks the very worst data available to base its periodic decisions on.  I mean, it’s China in January, a blip in the jobs numbers in June, Brexit next month, and, after that, what?  Until further notice, I’m all-in for 5-year CDs at whatever the best nationally-available rates are at the moment the funds hit my checking account.  Each of us has to do what’s best for our own situations, of course, but I, for one, think the road ahead will be brutal.  
Anonymous   |     |   Comment #6
I WANT THE TRUTH !!! .........................YOU CAN'T HANDLE THE TRUTH !!!
Anonymous   |     |   Comment #7
Much will depend on the election's outcome, and at present Mrs. Clinton is way ahead.  If she prevails, I expect economic activity to remain quite suppressed as has been the case for many years.  Should Trump surge, which I don't expect, I will go shorter expecting a pickup in activity and rates beneath his leadership.  If Mrs. Clinton remains in the lead, my tendency will be to lock in longer CDs ASAP at the highest rates I can locate.
me1004   |     |   Comment #12
Trump has already said he will replace Yellen, and says he always wants the Fed rate to remain low.
Anonymous   |     |   Comment #18
If you believe in political polls you probably believe in Yellen. Both can be manipulated to mean nothing and many pollsters know how easy you can manipulate the results. Just go in a democratic district and ask who they support and voila the democrats are double digit ahead, do the same thing in a republican area and the opposite is true. And many polls are paid by the subject being polled, guess who their finding will favor.
Anonymous   |     |   Comment #8
To optimistic, I think a quarter point in Dec 2025 and another quarter point in 2035.
Anonymous   |     |   Comment #9
The real reason the fed is not raising rates is because they expect Hillary to win and therefore the economy will suck for another 8 years!
jimbeau   |     |   Comment #13
Geez, great analysis, Anonymous.    The economy hasn't been stuck for the last eight years.  It's been slowly climbing out of the deepest hole since the Great Depression.    Remember it was on the Republicans watch that the US crashed the world economy.    7.4 million workers lost their job during the years of the Great Recession of 2007-2009.    It didn't help any that the Republicans were against job creation programs and extension of unemployment benefits.  Or, anything else that would promote consumption by the working class.   You know, the people that actually spend the money they get.  Basically, it was left to the FED to resuscitate the economy by clobbering the interest rates and assuming unheard of levels of debt via the various QE's.  This was all done to promote consumption by bailing-out debtors at the expense of savers.   Philosophically,  I was against the bailouts given to the rich.   However, without it the Great Recession probably would have been the Great Depression II.   Bernanke and Yellen may be the tools of Wall Street.   But, at least we still have our savings.   When the world economy was going over the cliff, I was happy for that.  And, I can live with paltry interest rates as long as inflation stays in check.   The Republicans destroyed the economy and now we're supposed to trust them with it again?   That sort of logic eludes me.   
Anonymous   |     |   Comment #17
Um, you must know DA is not quite famous yet for the logical gifts of its regular posters.
Anonymous   |     |   Comment #19
#13, in my book there are not political parties, we all contribute to the good and bad equally. If we are in one ship together and when it sinks, does not make any difference in which deck did you sit, the whole ship will sink.
Anonymous   |     |   Comment #23
The Right is on the Promenade Deck waving, while the Left in TugBoats are trying to get us out of the harbor
Jason   |     |   Comment #21
Please explain how doubling the national debt helped the economy.
jimbeau   |     |   Comment #25
Learn a little history, Jason.  This all started with Voodo Economics. Reagan took the national debt from 1.0 trillion to 2.8 trillion (effectively tripling the debt).  Bush-I added another 1.5 trillion (up 50%).   Bush-II added an additional 6.1 trillion (up 146%).   And, you've got a problem with Obama doubling the debt after the biggest economic decline since the Great Depression?   Due to the crashing economy that he inherited, revenues declined from 2.5 trillion in 2008 and didn't recover until 2013.   During recessions expenses go up due to unemployment claims, welfare and COLA adjustments.  Oh ya, don't forget the interest due on all that Republican debt. Despite this, the Republicans fought raising taxes to cover the difference.  So, don't go down the "how doubling the national debt helped the economy" road.   If the debt had been raised to increase employment, then it would have helped the economy.  You may as well pay people to work instead of them going on unemployment and welfare.  It's always OK to assume ridiculously large amounts of debt for wars (Civil War, World War I, World War II, Korean War, Cold War, Vietnam, the War on Terror) but god forbid that it's spent on infrastructure projects - or, national healthcare.      
Anonymous   |     |   Comment #28
Oh  We forget to add that our current President has added 6 trillion in debt. It's an historic achievement for Obama, CBS notes. "It's the largest increase to date under any U.S. president. During the eight-year presidency of George W. Bush, the debt soared by $4.9 trillion." http://www.weeklystandard.com/obamas-now-added-6-trillion-national-debt/article/704980 Plenty of blame to go around.  Oh and Billy Boy added 1.54 trillion.  Don't forget Congress plays a part too, Have to thank our current President for the low rates.  Let's see if we have negative rates on his watch.
Anonymous   |     |   Comment #29
And, the debt would be...if "he" let the economy "he" inherited tank? 
Anonymous   |     |   Comment #31
that's what I'm wondering.
Ed   |     |   Comment #24
Republicans.....so who passed NAFTA? Obamacare? Who appointed Yellen?
jimbeau   |     |   Comment #27
Actually, it was the Republicans that passed  NAFTA.  75% of House Republicans
voted for it.  Only, 40% of Democrates did.    And, of course, it was signed into law by that turncoat Clinton-I.

Supposedly, Obamacare will have zero affect on the national debt.  It includes 500 billion in new taxes and gets another 500 billion from Medicare cuts.   That's the only problem that I have with Obamacare.   The funding is equivalent to the Voodo economics that Republicans love so much.   The Medicare component is an exercise in intellectual dishonesty.   But then, Bush II and a Republican Congress added Part D without any way of funding it.  That little move dwarfs the cost of Obamacare.    But, nobody complains about that.  Probably because it was a windfall for the drug companies. 

As far a Yellen goes, what's the big deal?  You would've preferred Summers?  Jack Guynn?
Anonymous   |     |   Comment #43
You seem like an elusive individual.
Anonymous   |     |   Comment #44
#43....Stay focused on the issue, not the individual!
Anonymous   |     |   Comment #15
you are too optimistic  there will be a rate drop before the next increase in 2026
Bozo   |     |   Comment #10
We seem to be stuck in the "terrible two's". 2% SEC yields on intermediate-term bond funds, 2% yields on 5-yr CDs (+/-), 2% dividends on stock index funds, and a target inflation rate of 2%. If you feel like you are treading water, you are not alone. The search for "real return" (any yield above inflation) has become more, and more, difficult. Then, of course, you must factor in taxes (state and federal). Hard to fathom, but here we are.
Anonymous   |     |   Comment #11
The fed is killing the economy.
jimbeau   |     |   Comment #14
Even though things aren't wonderful, they're not horrible either.   When interest rates were trending down slower the the pace of inflation, it was easy to use CD's to beat inflation.   That used to be a 3 month CD!  Now, to marginally beat inflation you have to get 2% on a CD.   This year, there's been 3, 4 and 5 year CD's that were getting over 2%.  I used to be a big fan of TIPS for beating inflation.  During the deflationary period last year, principle balances of TIPS actually went down for those months of negative inflation.    TIPS are deflation adjusted as well.   This was something that was only considered to be an academic possibility in the past.  However, since the Great Depression, it's happened quite a few times.  Only iBonds are inflation adjusted without having the possibility of the principle value declining.   Right now, the composite rate for an iBond is 0.26%.   You can beat that with a savings account.  

Of course, the danger with CD's in a rising interest rate environment is twofold.    The first is the "opportunity cost" and the second is inflation.   I'm more worried about the inflation risk.    In the past,  interest rate declines lagged the decline in inflation.  So, you were always a little ahead of the game.  In the future, the opposite may occur.  If inflation creeps up and the TIPS yields recover, I'll be slowly moving back into TIPS and iBonds.  I actually prefer these as a 5 to 10 year "investment".  As long as inflation rises slowly, it may not be a bad thing if the FED raises rates slowly.  This will minimize both the "opportunity cost" and inflations losses.
Anonymous   |     |   Comment #16
being stuck in the 2s should not last long so keep your chin up.  Soon we will be in the 1s
ChrisCD   |     |   Comment #20
Getting their fast.  On the institutional side a bank was offering a 2.00% for a 10-year CD and they felt that was too high.  Be glad there are still some retail banks and credit unions willing to pay 2.00%.

cd :O)
Anonymous   |     |   Comment #22
I am going to give you all my considered economic analysis.  The FOMC is incompetent and dont know what they are doing.
paoli2   |     |   Comment #32
I beg to differ.  The FOMC is incompetent and are doing just what is expected of them to do.  Trash the savers again!    The Clintons have to make sure Wall Street has plenty of money to keep paying her and her hubby tons of money for "speeches"! 
Anonymous   |     |   Comment #26
There should be two sets of interest rate, one for the savers and one for the borrowers, the FED should butt out and see this country prosper again.
Anonymous   |     |   Comment #33
You just described market based rate discovery. What do you want for your savings and what is someone willing to pay to borrow those savings.
Anonymous   |     |   Comment #34
#33, That is the way it should work.  Let the market determine the interest rates! 

 Rather than the Fed manipulating the rates with their phony Cost of Living and inflation rate indexes along with their money printing press. 
Anonymous   |     |   Comment #42
A b s o l u t e l y
jimbeau   |     |   Comment #46
The CPI-U is what it is - a weighted index based upon individual cost components.  At the component level it's pretty much spot on.  And, it's is a pretty good representation of what's going on in the real world for the country as a whole in urban areas (that's what the U stands for).  However, it's unlikely that it represents any one person's true inflation rate.   It's a blend of what young, middle aged and old folks spend during the course of a lifetime.  So naturally, it's not going to match anyone in particular's inflation rate for a specific year.  To be sure, the FED's low rates and QE programs have hurt individual savers.  However, those things helped prevent the Great Recession turning into another Great Depression.   I'd rather get less interest on my savings than the possibility that those saving would have vanished. 
tony   |     |   Comment #50
you have no idea what you're talking about, but you must work for  one of the big banks.
jimbeau   |     |   Comment #51
Another "Anonymous" genius post.   No rebuttal based upon facts.  Just childish statements like "you have no idea what you're talking about".   And groundless speculation such as "you must work for one of the big banks".    Nope, I'm retired now.  My career was in IT consulting for multi-billion dollar corporations.   Not banking.    
Anonymous   |     |   Comment #30
Go ahead, make my day !!!
Anonymous   |     |   Comment #35
I wish the Fed would make my day  by butting out!
Anonymous   |     |   Comment #36
HA HA Savers. You lose again. Keep holding your breathe and waiting for the Fed to raise rates. I have been saying for over 2 years that they wont.....And then you online haters spew your hate at me. You're just jealous that I locked in 10 yr CD's 2 years ago and have been enjoying the highest rates possible ever since. Plus the market value makes them worth thousands more than principal. I win. You lose.
paoli2   |     |   Comment #37
Before you "Ha Ha" too long, I would love to know what EWP you got on those 10 Year CD's.  If you really put in quite a large chunk of your money in them and need some back for an unexpected emergency, that just might eat heartedly into how much those 10 year CDs could actually be worth to you.  Would you really win then?  I stick with 5 year CDs only for just that reason.  I don't think you have 10 year CDs with a six month EWP on them.  If you do, then you really have something to "Ha Ha" about.
Anonymous   |     |   Comment #38
maybe he's got the time you don't?
Anonymous   |     |   Comment #39
Right, today is the first day of the rest of your life
Anonymous   |     |   Comment #40
With rates as low as they are right now, we are all losing.
jimbeau   |     |   Comment #45
Unless your purchased a brokered CD, it has no "market value".   A bank CD is just worth the principal and accrued interest less the EWP.  There's no market value for that.  Assuming that you've got brokered CD's, you'll have to find someone that's willing to pay "thousands more than principal".   Good luck with that.

Also, what interest rate did you get on those 10 year CD's?  Just saying "your enjoying the highest rates possible ever since" is pretty meaningless.   As is pretty much anything that's said on this blog by the Anonymous crowd.  Phrases like "You're just jealous", "I win", "You lose" are pretty childish comments on a financial site.
Anonymous   |     |   Comment #48
  It's a brokered CD......it's worth $2700 more than principal......and no.....it's actually quite easy to sell as people are desperate for a decent return (3.30%). I may not get as much as the market value but guess I could at least make $2K......But there is no reason to sell. Where would I go?
jimbeau   |     |   Comment #49
3.30% isn't bad.  But 10 years is a long way out in this environment  (on yours, only 8 are left).  Usually, I don't like going-out more than 5 years on CDs.  I did break that rule by buying a regular 7 year CD that was yielding 3.0%.  We'll see how that works out.  I don't like going out farther than 5 years unless there's some inflation protection.  I've got some  10 year TIPS.  These still have the interest rate risk, but at least there's some built-in inflation protection.   With the yield on 10 year TIPS currently at 0.2%, you'd need an inflation rate of 3% to match your brokered CD.   The inflation rate for the last 12 months was 1.0%. So, right now the CD's are the better option.   If the TIPS yields ever recover, I'll buy more as an inflation hedge.
Anonymous   |     |   Comment #41
The FED is trying to spur lending by lowering rates but they are only causing the opposite effect.  Multiple studies show people are saving even more and not spending to make up for less interest.  The FED is a reckless ignorant bunch of fools, just my opinion.
Yield-Hunter   |     |   Comment #47
It's seriously time to bring back the 'Tontine' right now.  Sans corruption, it would fix a lot of the savers woes if the principals were adhered to.