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Another Fed Rate Hike - What Savers Should Expect in 2017


Another Fed Rate Hike - What Savers Should Expect in 2017

At the second FOMC meeting of the year, the Fed raised the federal funds rate by 25 basis points. The move had been widely expected since March 3rd when Fed Chair Janet Yellen gave a speech with strong signals pointing to a rate hike at this meeting. Here’s that all important paragraph in today’s FOMC statement:

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 3/4 to 1 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.

The Fed kept its note regarding its expectations for gradual increases in the federal funds rate. However, there was one slight change. They removed the word “only” in the sentence. It now says:

The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate

The Fed used to say “will warrant only gradual increases”. This change appears to open the door to faster rate increases. However, Fed Chair Yellen was asked about this change in the press conference, and she downplayed the change. She said that it’s “something that shouldn’t be overly interpreted”, and she “regards it as a relatively small change.”

In addition to the FOMC statement, the Fed released new economic projections which includes its projections on the federal funds rate, the “dot plot.” Since this rate hike was early in 2017, there had been expectations that the Fed may change its fed funds rate projections with more Fed members anticipating four or more rate hikes in 2017. That didn’t happen. Most FOMC members continue to anticipate just three rate hikes in 2017.

What To Expect from Deposit Rates

On Tuesday, I published an article from Sabrina Karl who researched the effects of the last two Fed rate hikes on deposit rates using our proprietary database of deposits data. She summarized the two rate hikes as having only a “middling effect – positive movement in some areas, flat lines in others, and even some unexpected downturns.” Will this Fed rate hike be different?

One reason to be optimistic is that this Fed rate hike shows that the Fed is on schedule, or even ahead of schedule, for the three rate hikes in 2017 that were indicated by the Fed’s December projections. That shows the Fed’s confidence in the economy, and that should increase the chance that we’ll see more banks increasing their rates.

Deposit Account Strategies for 2017

It seems very likely that Fed rate hikes in 2017 won’t be as gradual as they were in 2016 when there was just one hike. However, it’s still going to be gradual. Thus, we’re not going to see the deposit rate hikes that we saw in 2005 when the Fed increased rates eight times. With only a gradual rise in interest rates, today’s long-term CDs will likely earn more interest than if you keep that money in a savings account.

Of course, a CD ladder is a tried-and-true way to invest in CDs. With a CD ladder, you never have to wait too long for a CD to mature. In a rising interest rate environment, CD ladders provide more opportunities to roll over maturing CDs into new higher-rate CDs.

Another thing that helps CD investors in a rising rate environment is by choosing long-term CDs with early withdrawal penalties (EWP) of 6 months’ interest or less. A long-term CD with a 6-month early withdrawal penalty can be closed early and still be a better deal than many top shorter-term CDs kept to maturity.

As we discussed many times, there is some risk that the institution may not honor early withdrawals or may increase the EWP before a CD matures. That’s another reason to use CD ladders.

Currently, one of the best deals is at Capital One which is offering a 5-year CD with a 2.30% APY and an early withdrawal penalty of only six months of interest (see my blog post).

To review the effective rates of CDs closed early, please refer to our CD Early Withdrawal Penalty Calculator.

Lastly, you may find yourself keeping more cash in savings and checking accounts. That will be tempting as internet banks come out with higher savings account rates. Choose internet banks that have no minimum balance requirements and have solid ACH transfer capabilities. If your internet bank falls behind on rates, you’ll want to be able to easily and quickly move your money.

Future FOMC Meetings

The next three FOMC meetings are scheduled for May 2-3, June 13-14 and July 25-26. The June meeting will include the summary of economic projections and a press conference by Fed Chair Yellen.

Hoody   |     |   Comment #1
"Whoopee" (smirk) :)
Xuim   |     |   Comment #2
more like a cut since inflation has increased by a greater amount
Alcoholics_Anon   |     |   Comment #6
Good point. The latest inflation rate came out today. The trailing 12 month rate is 2.7%. You can get a 5 year TIPS with a YTM of -0.14% (yup, it's still marginally negative). That's the equivalent of a 2.56% 5 year CD. If the YTM goes positive before the auction in April, TIPS look like the better deal.
Bozo   |     |   Comment #28
Jimbeau, the problem with TIPS, is the problem with any bond: liquidity. For the average investor, a TIPS ladder is a bit daunting. A TIPS fund (whether through Vanguard or via an ETF) seems to have the same problem as any bond fund in a rising-rate environment. Full-disclosure: I owned a rather large position in Vanguard's TIPS fund years ago, made a few bucks, then got seriously wobbly knees and never got back in. I'm not exactly a neophyte, but TIPS always seemed something for the professionals. When anybody tells me something is "marginally negative" and is still a "buy", I know I am in over my head.
Jeff Yellin
Jeff Yellin   |     |   Comment #3
I have 670k in cash...I'll take any rate hike right now.
DCGuy   |     |   Comment #4
Any relation to Janet?
Alcoholics_Anon   |     |   Comment #9
Send me the 670K and I'll guarantee you 10% for the first 9 years.
aaa   |     |   Comment #11
Bernie M.! You're out now?
Maecl   |     |   Comment #5
I have a question that is a little off topic. I have been waiting for a rate hike to put some money into Vanguard short term bonds and ETF's. They have been off their 52 week lows for weeks and are up again today. Can anyone tell me why they haven't been down when it was known a rate hike was coming?
Mak   |     |   Comment #7
Take your pick
1-- sell the rumor by the news
2---everybody on the short side expecting rates to rise and bonds to drop, goes the other way
3---lot of overseas money looking for higher rates
4--maybe just a pullback in rates before they head higher
aaa   |     |   Comment #13
You forgot option 5 - the "Magic 8-Ball"
Xuim   |     |   Comment #18
seems more likely that the central banks will never stop buying bonds at any price, they will buy more or less, but will always be buying
Mario   |     |   Comment #20
Two likely reasons:
1. The bond market already has some expectations for future rate increases, so the current rate increase was probably already "priced in." Any move in bond prices right now is probably more related to future rate expectations (e.g., updated FRB projections).
2. The Vanguard short term bonds have a duration ~ 2-3 years. If you google "2 year Treasury Constant Maturity Rate" you can see a graph in the FRED database just how much the 2 year rate has been bouncing around in periods when the fed funds rate was not changed. In other words, the fed funds rate only affects the shortest end of the yield curve directly. If you look at the 1 month Treasury constant maturity rate, it starts to look much more similar to the fed funds rate.
aannoonn   |     |   Comment #8
As with Gas prices (which seem to always zoom up but merely flitter down), you can expect borrowing rates to zoom up -- but saving rates only to flitter up... maybe.. on the 3rd Tuesday of odd-numbered months, perhaps. Though it makes a site like Ken's here very valuable and needed in today's world.
Shorebreak   |     |   Comment #10
Interestingly, Treasuries rallied today with the 5-year Note yield plunging from 2.13% to 2.02%. Usually Treasuries would sell on a rate rise by the Fed, but in this case speculation the central bank might signal a faster pace of tightening was not in the cards today.
john   |     |   Comment #12
ONCE AGAIN NO RELIEF FOR SAVERS IN 10 YRS WE GOT ONE HALF FROM ZERO WHILE THE MKT WENT FROM 5000 TO 21000 LESS THAN 4% UNEMPLOYMENT all prices much higher houses ,auto , medical thru the roof they fed is playing with savors
decades   |     |   Comment #14
yes very frustrating ...even the Andrews deal vanished ..at least those here probably took advantage of it ..thanks Ken your a godsend....still have some mileage left on the 3% penfed and Northwest deals.. ... a buddy of mine just took out a local 10yr cd @ 2% and told me ..a bird in hand is worth two in the bush ...ooooook.... many don't chase rates like us ...the stock market while not in bubble territory is definitely expensive and I have to consider it a missed opportunity ..missed money better than lost money though as I don't plan to dive in now .....patience.....will keep calm and listen to The Brian Jonestown Massacre....MAGA !
DOA   |     |   Comment #15
Again and again, just another lesson learned on why to stay with a laddered cd program.
Anony   |     |   Comment #16
Of course the FED favored the stock market...that was the point. Savers' money is not in demand so the price is low. It's all basic economics. I'm always fascinated by microeconomics. Savers want high rates, investors want ever increasing value, dividends must grow yearly, you must work hard and I am entitled to enjoy my retirement in luxury...hence I want 5-6% return on my CD's. Savers are at the bottom of the modern economic food chain. Fiat money, folks, fiat money.
Bogey   |     |   Comment #17
How right you are. The top 1 percent and others that are really well off financially didn't get their by putting their money in savings accounts and CDs. Although the stock market and other risk oriented investments aren't for everybody.

Unfortunately, among the super rich, there will always be the poor, many of which are poor due to circumstances beyond their control.
deplorable 1
deplorable 1   |     |   Comment #19
See I told you guys as soon as Obama was gone we would get rate hikes again. The banks just need to stop dragging their feet and pass them on to us savers now.
Alcoholics_Anon   |     |   Comment #21
Tell your buddy Trump to get on their case....
The Russians are coming!
The Russians are coming!   |     |   Comment #22
0% 8 years with Obama all because bleeding heart Democrat liberals had to come up with a made up quota for minority home loans. That caused the housing crisis which led to the financial crisis which has led us to these low rates today. Any questions? You have just been schooled.
Bozo   |     |   Comment #24
I love your handle "The Russians are Coming!". I doubt you suspect the irony. In the current administration, one might argue they are already here. Moving right along, the causes of the 2008 implosion in mortgages (which went much further than loans to minorities, might I add) are varied and complex. As a life-long Republican, and hardly a "bleeding-heart liberal", I submit your post attacking an entire class of people (whether they be liberal Democrats or blacks), offers little to no value towards an intelligent discussion.

This is a forum for discussing deposit accounts. Rational, cogent, posts regarding rates or policy decisions regarding same are worthy. Inane rants are not.
Tawana Brawley
Tawana Brawley   |     |   Comment #26
You say little or no value to the comment.....but it's kind of true. People making 40k were allowed to get 400k mortgages.
Bozo   |     |   Comment #29
Tawana Brawley, I agree, but that's just a teeny-tiny sliver of the cause. My objection was the suggestion by the poster The Russians are Coming! that the melt-down was somehow linked to Obama, or bleeding-heart liberal Democrats, which simply has no basis in fact. Indeed, had the poster done his homework, he would know that the melt-down was due more to improper characterization and securitization, most often by us "white folks". It's the not-so-subtle racial animus that really grates on me.
The Russians are coming!
The Russians are coming!   |     |   Comment #32
@Bozo: Apparently you missed the sarcasm of my screen name. Liberal Democrats have been screaming their heads off about supposed links to Russia with no proof for over 6 months now. They need to give it up already Trump won Hillary lost. The root cause of the housing crisis was the liberal Democrats on the Senate banking committee who thought in their infinite wisdom that there were not enough home loans being given to minority groups and the poor. This is a fact which has been denied all to often on many forums. This is 100% responsible for the housing crisis and the subsequent financial crisis which led to 0% interest rates for Obama's entire 2 terms. Don't tell me that derivatives caused everything either because those exact same derivatives would have made big bucks for the banks had people paid their mortgages. This political discussion is very relevant to interest rates because politics is what caused all this mess. Now you can call yourself a Republican if you wish many RINO's do. I call myself a conservative because no party represents me 100%. Don't any of you find it one bit ironic that interest rates are finally going up now that Obama is gone? You all really think that it is just a coincidence?
Bozo   |     |   Comment #36
The Russians are Coming!, alas, you posit as a fact "denied all too often on many forums" a myth. Mythology has its place, but so do facts. Myth: Obama was the cause of the 2008 financial crisis. Fact: Obama did not become President until 2009. Myth: liberal Democrats pushed through all the horrid policies leading up to the 2008 crisis. Fact: George Bush was President and Republicans controlled both the House and Senate after the election of 2004. The Democrats did not re-capture Congress and the White House (in 2009) until the melt-down was in full swing. Myth: the Trump-Russia connection is a giant left-wing conspiracy. Fact: As Comey noted today, the investigation is ongoing. Flynn, Stone, Page, all are under investigation, perhaps more. Myth: Obama wiretapped Trump Tower. Fact: sheer lunacy. Should I go on?
Bozo   |     |   Comment #37
PS: Breaking news. The Fox News legal "guru", Andrew Napolitano, has been mysteriously removed from the network. Mind you, he was the "source" of the British spying myth, quoted by Sean Spicer, the President's press secretary.
The Russians are coming!
The Russians are coming!   |     |   Comment #40
@Bozo: You sound like a liberal Democrat Bozo. I must have hit a nerve with the RINO thing. First of all nowhere did I say that Obama caused the housing crisis. I said it was liberal Democrats on the senate banking committee. Bush and Republicans warned them many times about those loans before the housing crisis only to fall on deaf ears. Democrats controlled congress back then so they had the votes and power to push whatever agenda they wanted and home loans to minority groups and the poor was their agenda "everybody deserves a house" remember? If you don't agree you are racist Maxine Waters, crooked Charlie Wrangle. Maybe you would like to justify how interest rates are just starting to go up now after Obama has side stepped it out of the white house? FED being political perhaps? You must think Obamacare was a big success too and that Republicans should embrace it! lol You are about as Republican as I am a liberal.
Bozo   |     |   Comment #38
The Russians are Coming!, apparently you missed the irony of your own screen name. The Russians are already here. The ties to Russia within the Trump circle are well-documented, If you have not read the book "The Manchurian Candidate", I assume it is available at a local library.
Bozo   |     |   Comment #39
Even Rupert Murdoch and Fox News have begun to distance themselves from this idiot. Shep Smith was the first indication. The barring of dimwit Napolitano from air-time was second. After a month or so, the only thing idiot Trump will have is twitter and InfoWars. Sad!
LuvCD   |     |   Comment #25
#22...you don't know what you don't know...at least try to separate fact/opinion and express the latter if economically based
Att   |     |   Comment #23
They are going to allow interest rate spreads to increase so they make more money on lending. Rates will go up like a glacier pace.
Bozo   |     |   Comment #27
Att, too funny. The other day, my wife asked if our CDs would now all go up 25 basis points. I had to give her the bad news. The irony is, the intermediate-term Treasuries actually moderated when the Fed announced. Go figure. I gave up trying to discern a linkage between the FedFundsRate, Treasury yields, and the rates various financial institutions pay on their CDs long ago. Now, I go with the flow, and thank goodness Ken's blog exists.
!!!   |     |   Comment #30
Perhaps you should school your wife on how CD rates doe not automatically raise in tandem with the Fed rate increases instead of admonishing others when you don't like what they post on the blog site.

Everyone is entitled to their own opinion. Ken or his official monitors will take care of any inappropriate posts.
Att   |     |   Comment #31
Ken's blog is a godsend. He keeps coming up with these occasional rate deals. He has helped my returns emencely.
will   |     |   Comment #33
The unspoken reality is this: in the Fed's judgment, the economy will tolerate a series of cut-backs in the stimulant that lower interest rates provide, by the Fed starting to run a policy of raising rates in a measured way over time in order to get rates to a level that would--when the next recession has appeared on the radar--enable lower interest rates to be used again as a stimulant. The Fed sees the economy as good enough for the near-term for the Fed to start running its policy of being prepared for the inevitably of lowering rates in the future when that appears desirable.
Att   |     |   Comment #34
The Fed will rise rates slowly and the banks will do it at an even slower pace.
Bogey   |     |   Comment #35
Yep, nothing new about that when it pertains to deposit account rates. Now the interest rate increases for borrowers will be adjusted much quicker.
#41 - This comment has been removed for violating our comment policy.