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Fed Holds Steady But Chance of a September Rate Hike Increases


Fed Holds Steady But Chance of a September Rate Hike Increases

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.

Anonymous   |     |   Comment #1
Yes we will, no we won't, yes we will, no we won't, yes we will, no we won't, yes we will, no we won't.
Anonymous   |     |   Comment #3
What are you talking about?  The Fed has always consistently maintained they'll raise the Federal Funds rate when they believe economic conditions warrant it.
Anonymous   |     |   Comment #4
#3, are you confirming that under Obama there never were good economic conditions, because the democrats just confirmed that the economy is in great shape and never been better, are they lying too or the Fed is telling the truth?
gregk   |     |   Comment #12
Can you document anyone having said "the economy is in great shape and never been better"?

There may be judgments that the economy is "improving" or "better than it was" or some such, dependent on what data you are looking at and what comparisons you are making.

Is there any meaning at all in simply proclaiming the economy as "good" or "bad" - and someone "lying" or "telling the truth" when they say that?

An economy is made up of a huge number of interacting variables, the outcomes and impacts of which can be evaluated from many alternative perspectives.

I don't know what point you're trying to make, but suspect it's a rather empty.
Anonymous   |     |   Comment #2
Those 3.3% 10-year brokered CD's purchased under duress are now 7-year 3.3% CD's. The FED is now forecasting 2% annual growth as the "new normal". That means lowwww rates for a very long time. Savy savers will be lucky to keep pace with inflation. Anyone planning on interest as a reliable source of retirement income is living in the distant past.
Anonymous   |     |   Comment #5
The problems savers have coping with low rates, are the same that strain the accounts of pension managers. Earlier, Yellen expressed concern with inflation, in healthcare costs, but did nothing. Now, 2017 Obamacare health insurance in California will inflate by 13 percent, 26 percent increase in Oregon, Pennsylvania has requested a 23 percent increase, and the Kaiser Foundation will increase its second lowest silver plans by an average of 11 percent. With the 10 year bond interest at 1.5 percent, and the equity markets stalled with record high margin debt, pension plans are struggling. California grocers are unwilling to cover the inflated healthcare cost increases for their employees. As a result California grocery workers union just approved a strike. Despite record high automobile sales, the combined assets for retiree benefits at GM, Ford and Chrysler had a shortfall of $20 billion. When Yellen took office she expressed her desire to influence monetary policy to help the disadvantaged. But instead she yields to corporate hanky and political panky.
Anonymous   |     |   Comment #6
She's trying to keep her job!
DCGuy   |     |   Comment #13
With Medicare and Social Security needing reform and with the universal health care costs to pile it on some more, people who are on retirement or just starting to work are going to have to take their lumps.  I am glad that I do not have many work years left to go and my private pension fund along with the 401(k) and IRAs would not be too negatively impacted by the very low interest rates.
Anonymous   |     |   Comment #7
And the beat goes on.
dale26s   |     |   Comment #8
if rates rise gradually , can we expect  long term rates hold steady, vs eventual rise? i know this is complex, but any educated predictions- with \lots of funds coming due  Aug. & Dec. this year, wondering if I should stay short, lock in long dismal rates vs barbel
Anonymous   |     |   Comment #9
As Ken says...long term,,short penalty
Anonymous   |     |   Comment #10
ofcourse thanks
Anonymous   |     |   Comment #11
Indecision and timidity runs rampant at the Fed.  Yellen is defined by these words.
Anonymous   |     |   Comment #14
And there you have it, folks. The rigged weak economic report to justify no rate increases. Today's headline: US economy grew less than expected. Key words: "less than expected". These three words can make things look good or bad by making expectations too low or too high.

For example:

I lost my job, but it was better than expected.
I lost my house, but it was better than expected.
My wife ran off with another man, but it was better than expected.
I am now homeless, but it is better than expected.
Anonymous   |     |   Comment #17
It's not rigged. Earnings are down and the general economy is stuck at 1.2% growth, which is a disaster if it continues long term. The "recovery" has been terrible; nothing more than a redistribution of wealth. Obama wanted a wealth redistribution and they produced it! More money was distributed to the 1/10 of 1%. Ooops, wrong outcome to another failed socialist policy. FREE MARKET CAPITALISM is the most powerful economic engine every invented. Nothing else compares. Too bad the elites don't foster that notion and encourage (or demand) excellence as a prerequisite to success.  
jimbeau   |     |   Comment #25
You've been reading too much Alisa Zinov'yevna Rosenbaum!
Anonymous   |     |   Comment #16
I've noticed lately that the institutions that offer rates much higher than average are few and far between.  and many of those that do are limiting the amount of the CD.  Even if rates go up we won't see much of an improvement. Since the last hike it looks to me that rates went down.   
gregk   |     |   Comment #18
Institutions that offer rates much higher than average are almost by definition few and far between, - not just "lately" but always, -  else they'd be just another exemplar of the always much more common norm.
Rates on longer term CD's are (understandably) driven by expectations of future rates rather than more immediate conditions (or actions by the Fed in response to them).  Thus if FI's expect any future Fed rate hikes to be sustained or continued we most certainly will see improvement in CD rates, - an expectation that never occurred after the Fed's December 2015 rate increase but rather went into reverse soon thereafter, thus explaining the cuts you refer to.  But in fact (as Ken has often noted here) shorter term CD rates did go up after last year's Fed action and remain better than before it even now.  You need to be a bit more discriminating in your observations I think. 

Anonymous   |     |   Comment #19
The Short term rates you mention are for 6 month CDs which I don't even consider. To much brother to open for a CD. Penfed almost annually would offer a CD rate much higher than average. Many of the blog posts are for limited availability CD's. The last high rate CD I was able to take advantage of was NWFCU that had a 4 year 3.04% with an add on. But inflation is low do the returns on our CDs are to be expected.
Anonymous   |     |   Comment #20
Make that a 3yr
decades   |     |   Comment #22
i put 200k in Penfeds last 3% offering ..also 100k in the nwfcu 3% deal...and 200k in the Andrews fcu 3% IRA CD ......slim pickings so had to really thread the needle ....have a couple reward checking accts local  30 k each paying 2% and 3% respectively ..Ken is a great man needless to say ... nibbled on silver the past two years and have had a toe hold position in lending club loans making 9.5%.avg annual return ...burned so far on thier IPO though.. -66% ...my small stock portfolio doing well except for oil stocks stock valuations , P/E and  Cape ratios at scary levels making me think future returns may be muted but will probably be proven wrong again ..considering doing the bogel heads thing and a couple quant strategys ..maybe
dale26s   |     |   Comment #23
i can relate- as many of us can.. may I ask .whats the boggleheads thing...i am actually thinking of putting more into individual munis although i have to go out over 9 yrs to get a rae equivalent to 3%
Anonymous   |     |   Comment #24
Have no fear, the FED is here. Nothing can make the markets go down, nothing. You have nothing to fear except fear itself.
Anonymous   |     |   Comment #21
But, but, those democrats were just touting how the economy has grown during President Obama's leadership.

So there's not reason not to raise the interests rates now!  Or were they telling tall donkey tales?