As widely expected, the Fed decided yet again not to raise interest rates on Wednesday at the end of its fifth scheduled FOMC meeting of the year.
The important thing to note from the FOMC statement is that there are signs that the Fed is preparing to hike rates, perhaps at its next meeting in September (if you believe the Fed isn’t waiting to after the election). The first sign is in the first sentence of the statement. Below is the first sentence from the June statement:
Information received since the Federal Open Market Committee met in April indicates that the pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up.
Below is the first sentence from today’s statement:
Information received since the Federal Open Market Committee met in June indicates that the labor market strengthened and that economic activity has been expanding at a moderate rate.
As you can see, the Fed’s perception of the labor market and economic activity have improved. Bill McBride of the Calculated Risk Blog said in his FOMC preview post that such a change would suggest that the “FOMC is probably preparing - if the improved data flow continues - to raise rates in September.”
The second sign that the Fed is preparing for a rate hike was the addition of the following sentence:
Near-term risks to the economic outlook have diminished
This appears to be an acknowledgement that the Brexit vote in June didn’t have an immediate impact to the US economy.
Finally, one of the FOMC members voted against holding rates steady. According to the statement:
Esther L. George, who preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.
George didn’t vote against holding steady in June. She did vote against holding steady in March and April so this change doesn’t mean a September rate hike is a sure thing. However, it’s another sign that a September rate hike is a possibility.
It appears that the Fed funds futures also see in the FOMC statement an increased chance of a rate hike for later this year. From late yesterday to today, the implied probability of a September rate hike has increased from 22% to 25%, and for a December rate hike, it has increased from 45% to 50%.
Deposit Account Strategies
I still think banks are unlikely to move much on deposit rates until we see another Fed rate hike. The December 2015 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. To see how past Fed rate changes have impacted deposit rates, please refer the blog post, “How Do Consumer Deposit Rates Track with Fed Rate Changes?”.
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 go even slower on its rate hikes.
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 September 20-21, November 1-2 and December 13-14. The September and December meetings will include the summary of economic projections and a press conference by Fed Chair Yellen.