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.