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Fed Holds Rates Steady - Strategies for Savers

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Fed Holds Rates Steady - Strategies for Savers

The Fed decided to hold off on a rate hike at its first FOMC meeting of the year. This was widely expected since the Fed increased rates at the last meeting. As can be seen in the following excerpt from today’s FOMC statement, the Fed included its typical wording about keeping rates unchanged:

In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1/2 to 3/4 percent.

What’s not clear from today’s policy statement is if the Fed is preparing for a March rate hike. There were a few small signs that the Fed may do another rate hike in March. First, the Fed changed its inflation wording. In December, the statement said that “inflation is expected to rise to 2 percent.” In today’s statement, it said that “inflation will rise to 2 percent.” The Fed also added new language in the statement that suggests the Fed is a little more optimistic about the economy. That new language said that “[m]easures of consumer and business sentiment have improved of late.”

All FOMC voting members voted in favor of the policy action. No one dissented. There were a few new voting members due to the yearly rotation of regional presidents. Dallas Fed president Robert Kaplan and Philadelphia Fed president Patrick Harker appear to be slightly hawkish. Minneapolis Fed president Neel Kashkari appears to be more of a dove. Recently, he was pushing for the Fed to tolerate 2.5% inflation.

The markets appear to be viewing the FOMC statement as suggesting a reduced chance of a March rate hike. Markets are pricing in only a 13% chance of a rate hike in March, based on fed fund futures contracts. This had been 21% yesterday. The fed fund futures are still indicating a solid chance of a June rate hike (68%). This is just slightly down from yesterday (70%).

Fed officials in December suggested via their dot plots that there will most likely be three more rate hikes in 2017. If that comes true, it looks like June, September and December would be the most likely meetings for rate hikes.

Deposit Account Strategies

Today’s meeting reinforces what we’ve long seen from the Fed: rate hikes will be very gradual. Thus, long-term CDs and CD ladders still make sense. The best CD deal is currently the 7-year CD and IRA CD from Andrews Federal Credit Union. It has a 3% APY with an early withdrawal penalty of only 6 months’ interest.

For more strategy discussion, please see my article from last month, Deposit Account Strategies for 2017.

Future FOMC Meetings

The next three FOMC meetings are scheduled for March 14-15, May 2-3, and June 13-14. The March and June meetings will include the summary of economic projections and a press conference by Fed Chair Yellen.

Comments
jennifer
jennifer   |     |   Comment #1
Thanks for posting this article. In addition, I want you to know that your CD early withdrawal calculator is absolutely brilliant! It is amazingly sophisticated in that it even knows the penalties and term options at the various institutions and the comparison tool is to die for. I simply adore it.
Mak
Mak   |     |   Comment #2
I've never opened a CD with the thought of closing it early .......and people can't understand why banks and credit unions are raising their early withdrawal penalties.
ATT
ATT   |     |   Comment #3
Some still have low EWPs. It is one of Ken's stradagies and he mentions it quite often. I myself used it once.
itserich
itserich   |     |   Comment #4
Financial institutions can hedge the risk of early withdrawals at low cost.

Your sentiment reminds me of people who declined to abandon overpriced mortgages, even when the mortgages are non recourse.

Informed consumers should make decisions in their own best interests. It is a business transaction, and everyone agrees to the terms.
About time
About time   |     |   Comment #8
#4 is right... they know the "numbers" as to how many may take early redemptions and factor that into the calculus...the sad part is the smaller institutions that don't use "these" tools!
!!!
!!!   |     |   Comment #5
I agree one hundred percent with you, Mak. Factoring in EWPs for CDs certainly is not part of my financial planning. Leave the trading to stocks and bonds. Build a good CD ladder and don't sweat EWPs.
ATT
ATT   |     |   Comment #6
I closed a CD that I had with Penfed paying 2% or so and paid the EWP. I opened with those funds at Penfed a CD paying 5% for 10 years in 2010. This is the one time I did this. Just an option to keep open along with laddering. This is the only time I did this. I do look for low EWPs when opening long term CDs. If the opportunity arises again I will take advantage of it.
dale26s
dale26s   |     |   Comment #15
I also closed ac PenFed CD early when it made sense to take advantage of another institutions special special I'm wondering if anybody has successfully closed CDs early at other institutions it seems like we're taking this as a given I'm just wondering if people have experienced problems
klink
klink   |     |   Comment #20
Closed a Barclays CD early and re-invested it as well as additional funds in another CD with Barclays at a new interest rate. No problems at all.
Bozo
Bozo   |     |   Comment #7
Re: Break Strategies. Ken's blog provides invaluable tools to determine whether a break strategy is right for you. Personally, I prefer a ladder. But, seriously, how many people actually break CDs in order to achieve a higher yield with the funds thus "liberated". I doubt any reliable survey exists.
Mak
Mak   |     |   Comment #9
If you have a CD ladder you should have CDs coming due at least once or twice a year, I myself have more than that coming due so I always have funds to reinvest. I can see doing it in certain cases but all I'm saying is don't be surprised when the EWPs rise. I really don't know if the EWPs were designed to help customers get in and out of a CD as if it were a bond or a stock, my guess is they weren't.
Bozo
Bozo   |     |   Comment #18
Mak, I suspect what you suspect. As, I suspect EWPs were designed for their "stickiness" factor. When rates were declining, financial institutions probably cared less about EWPs. Aside from the "hot deal" here and there, folks were generally happy keeping the yields they had. Now, with interest rates increasing, financial institutions need to tighten up EWPs, so as to avoid a flight to higher interest rates. This should not come as a shock. As noted in other threads, holders of IRA CDs over the age of 59 1/2 may circumvent EWPs entirely in certain institutions. Folks in the RMD stage of life may as well.
Eddie
Eddie   |     |   Comment #10
So......where are the turkeys that still thinks we will get 3 rate hikes this year? The same ones dreaming that we will get CD rates higher than 3%? LOL
anonymous
anonymous   |     |   Comment #11
Probably no one here thinks that, Eddie, nor is anyone dreaming of 3%+ CD's. We believe when we see. Your post is a turkey.
bye bye Obama
bye bye Obama   |     |   Comment #16
@Eddie: Everything is still pointing to 3 rate hikes this year the FED even changed their wording. Did you read the article?
Ho Mer
Ho Mer   |     |   Comment #12
NavyFCU also have a 3% CD which is 1.5year so its better, plus u can put in additional money into it not like AndrewsFCU bc they dont allow to add money to the existing cd only u have to open a new CD which will have a new maturity date unline NFCU, but the only thing that NFCU have a max of 13,000usd at 3% :-(
???
???   |     |   Comment #13
Are you the Ho Mer from the "The Simsons"? You might want to be sure have read the offers correctly.
bye bye Obama
bye bye Obama   |     |   Comment #19
That's a 2% 18 month CD Homer it is still a better deal though as rates on long term CD's will be higher by then.
#14 - This comment has been removed for violating our comment policy.
RJM
RJM   |     |   Comment #21
Im going to open a 12-15 month CD at Penfed today or monday. Which should I get ? The 12 month is 1.31% and the 15 month is 1.41%, I think. (I already have a ladder with longer term CDs and Im not interested in joining a new bank or credit union for a modestly higher rate) Thanks
RJM
RJM   |     |   Comment #22
I went ahead with the 15 month since nobody responded right away. I think she said the early closure penalty was the accrued interest if inside a year and 30% of the total interest if later. Ive never closed one early but I didn't used to have them in a rising rate environment. (I used to take bigger risks in the stock market when I was younger)
Bozo
Bozo   |     |   Comment #23
PenFed member here as well. Talk about a moving target. I have two IRA CDs maturing this year, and it's anyone's guess what rate will attach.
Anonymous
Anonymous   |     |   Comment #24
The FED is truly duplicitous. It takes four 25 basis point increases to get a lousy 1 percentage point increase. They signaled rate increases were forthcoming and they bailed. If you're on this site build a simple CD ladder, sit back and enjoy life. I'm absolutely convinced that when the need arises the FED won't hesitate a moment to impose negative interest rates. Remember, some of the "smartest" kids on the block have done more damage to your finances than a robber with a gun. As a reward, we let them keep their bonuses.
!!!
!!!   |     |   Comment #25
WE did not let them keep their bonuses. WE had no say in the matter.
Anonymous
Anonymous   |     |   Comment #26
I gave you a vote. I was being polite. We should have jailed many of them. None of it was accidental.
Bozo
Bozo   |     |   Comment #27
To: Anonymous (Comment #24). Not sure I see a direct correlation between the FedFundsRate and deposit accounts.
???
???   |     |   Comment #28
getting popcorn