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Fed Holds Steady with Future Rate Hikes Anticipated To Be More Gradual


Fed Holds Steady with Future Rate Hikes Anticipated To Be More Gradual

The Fed yet again decided to hold off on a rate hike at its sixth FOMC meeting of the year. As we have seen many times in the past, it doesn’t take much to convince the Fed to postpone a rate hike. The FOMC statement noted improvements in the economy, but the improvements weren’t enough. The following sentence was added to the rates paragraph in the statement:

The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives.

Another important thing to note in the statement is that three members voted against holding steady. That’s the highest number since 2014. The statement has the details:

Voting against the action were: Esther L. George, Loretta J. Mester, and Eric Rosengren, each of whom preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.

In addition to the statement, the Fed released its economic projections including its projections on the Fed funds rate, the “dot plot”. Most Fed members anticipate one rate hike before the end of the year. The Fed now only has two more meetings in 2016, and the next meeting is a week before the election.

Another point about the dot plot is that the Fed lowered the expected Fed funds rate level for future years. As we have seen this year, these Fed funds rate levels have been too optimistic. At the start of the year, the dot plot suggested four rate hikes for this year. Now we’ll be lucky to have just one.

Lastly, Fed Chair Janet Yellen gave a press briefing after the release of the FOMC statement. The Fed Chair was asked a few times by reporters if the Fed was being influenced in any way by politics or the upcoming election. According to the Fed Chair, “we do not discuss politics at our meetings.”

According to the Fed funds futures, the outcome of the FOMC meeting had little effect on the chance of a December rate hike. From late yesterday to today, the implied probability of a December rate hike has decreased from 60% to 59%.

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.

Once the next Fed rate hike occurs, we may start seeing some upward movement in deposit rates, but I doubt we’ll see much movement until we see regular Fed rate hikes. Based on the Fed’s dot plot and the Fed’s history, future rate hikes will probably be very gradual.

With the high likelihood of only a very gradual increase in rates, long-term CDs and CD ladders still make sense. Currently, 5-year CDs are generally the best deals. The only exception is the 3% APY 7-year IRA CD at Andrews FCU.

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 November 1-2, December 13-14 and January 31/February 1. The December meeting will include the summary of economic projections and a press conference by Fed Chair Yellen.

Anonymous   |     |   Comment #1
Why even anticipate any changes? It's always the same theatrics. A couple of remarks by Fed officials that a rate rise may be coming in the next meeting. The markets then go down in reaction. Followed by no rate hike after the FOMC meets and the markets rally. Wall Street and the Fed are all in cahoots to game the system. The small investors and savers are collateral damage no matter what occurs.
Anonymous   |     |   Comment #20
FOMC, we will raise the rates when all off these is fulfilled:

Inflation above 2%, no above 3%, no above4%, unemployment bellow 6%, no bellow 5%, no bellow 4%, GDP above 3%, no above 4%, no above 5%, the election date to past first and then a democrat to be elected and then the congress to become democrat and then the central banks around the globe to approve FED rate raise and to give them 6 months warring............the rest will be changed as needed to accommodate the new administration wishes and wait for the globalist wish list what to do next.
Anonymous   |     |   Comment #2
The word is out. Central banks have failed.
rateshopper   |     |   Comment #3
What a joke.  Does anyone think the Fed knows what it is doing? To them, it will never be a good time to raise rates. We live in a centrally planned economic system. No different than China or the former Soviet Union. RIP the free market system. I hope I live long enough to see the mess down the road this will inevitably cause.
Anonymous   |     |   Comment #4
The Fed knows exactly what it is doing.  However, while serving special interest groups,  it is not what we prudent savers want it to do.   
Anonymous   |     |   Comment #8
Actually, they keep "guessing" their "new" set of "tools" will do the "job" of increasing the cost of everything you buy. This is a private bank cartel serving the interests of private banks on your dime. It is the most blatant manifestation of privatizing gains while socializing losses.
Anonymous   |     |   Comment #5
Can you say "bubble"?
Anonymous   |     |   Comment #6
get even, get a few new cards then max out the others
hank   |     |   Comment #7
it is fair to say the fed doesn't know what it is doing and there is no evidence it is doing anything good.  The economy would be better off if they did not exist
Anonymous   |     |   Comment #9
Seeking to avoid:

Janet Yellen:  You're fired!

Anonymous   |     |   Comment #11
"More Gradual"? Is this even possible?
Anonymous   |     |   Comment #14
How can they get more gradual than nothing over the last 8 years and no I'm not counting that head fake joke of a rate hike last Dec. since CD's and bank account rates have dropped even further since then. We are still at 0%. The FED is 100% political. They don't need to discuss politics at the meetings as they already know exactly what Obama wanted them to do which is keep rates at 0% so the 20 trillion dollar debt he ran up wouldn't grow as fast. The only way we get a rate hike is if Trump is elected and that will only be to make him look bad because stocks would go down temporarily. If Hillary gets in you can expect the debt to triple and interest rates to go negative.
Anonymous   |     |   Comment #15
Thanks for the hard work Ken. Even though the news for us savers is bad at least I have been able to eek out a little interest from the higher yielding bank accounts, CD's and bonuses from using your site. That long term dot plot looks scary as it shows they never want to get back to 5% again. Not good for us retirees who were looking to earn safe interest.
Anonymous   |     |   Comment #16
Even if the fed had raised rates in September, and kept that pace, of one raise every 9 months, it would be another 8 years before the fed funds rate would return to 3 percent. In the last 8 years the average price of a home doubled, healthcare premiums have doubled and tripled. Yet unbelievably, except for the news media, inflation was 11 percent for all 8 years. In Yellen's inaugural speech she talked about using monetary influence to help the underprivileged. She helped them to be renters for the rest of their lives. As the price of the american dream inflated out of reach. And the price of rent now takes their savings. Wage increases, in many companies, are based on the rate of inflation. A manipulated low inflation rate leads to low pay raises. So the fed creates "helicopter drops of money", and requires liberal governments to institute raises in the minimum wage, instead of the increases being dependent on a true rate of inflation.
Anonymous   |     |   Comment #17
Bunch of political bureaucrats creating their own economic, employment/unemployment and GDP numbers and then they seat down to vote on those made up number. Comedy central anyone!
Anonymous   |     |   Comment #19
Thanks Ken, you do a wonderful job with your website.
Smokeboat   |     |   Comment #21
Bartender, We'll have another round.   These peanuts are salty.   Economic slaves.
Anonymous   |     |   Comment #22
Expect a lot more FED fake talk this week to continue their game of obfuscation.