Federal Reserve, the Economy and CD Rate Forecast - July 23, 2019
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Banking 101: What Is the Durbin Amendment?The Impact of the GOP Tax Bill on Savers
I’m very pleased to announce that Sol Nasisi will be a regular contributor to DepositAccounts. Many of you may be familiar with Sol from his time at BestCashCow where he is the co-founder and a past president. Last year Sol left BestCashCow and is now working on other projects. I was thrilled when Sol approached me with an interest in contributing to DepositAccounts. Sol will be writing a few articles a month on trends, news and issues that impact savers. I’m sure you will appreciate his analysis and insights that he has gained from his many years in the banking industry. Please join me in welcoming Sol Nasisi.
The Impact of the GOP Tax Bill on Savers
by Sol Nasisi
Ever since the 2008 financial crisis, savers have taken it on the chin with rock bottom interest rates. The Federal Reserve, in an effort to revive the economy, lowered the federal funds rate, deflating returns for savers and creating an almost decade-long spell of near 0% returns on savings and CDs.
Finally, in 2015 as the economy continued to grow, the Fed began to reverse its 0% interest policy and rates began to slowly rise. On Dec.13, the Fed announced the latest of its five rate hikes since 2015, raising the Fed Funds Rate to 1.50%.
Many have analyzed how the GOP tax bill will impact lending, real estate, and small businesses, but scant attention has been paid to savers. The good news for savers is that the GOP tax bill that is currently winding through Congress has the potential to further accelerate the economy, as least in the short-term, and quicken the pace of rate increases over the next year. Although savings and CD rates may not return to the 6% range anytime soon, the GOP tax bill on the whole provides upside potential for savers.
Key provisions that will have a significant impact on savers
The House and the Senate bills differ in several significant aspects but some of the key tenets are the same. Three provisions of the GOP tax bill will most impact savers.
Lower rates within the new tax brackets
Both the Senate and House tax bills aim to lower federal income taxes for many Americans. The House seeks to accomplish this by cutting the number of tax brackets to four (10%, 25%, 35% and 39.6%) versus the seven brackets today (10%, 15%, 25%, 28%, 33%, 35% and 39.6%). The Senate bill will keep the seven brackets but lower the rates to 10%, 12%, 22%, 24%, 32%, 35%, and 38.5%. Many, although not all, Americans will fall into lower rate tax brackets with either of these plans.
Individuals who put their money into savings or CD accounts must pay taxes on the income generated on their returns. Depending on whether the Senate or House plan is passed, a saver’s tax bracket could drop, reducing the tax they have to pay on any interest income earned on deposit products. A saver in the current 33% tax bracket who has $100,000 in a CD at 1.5% APY will pay $495 in taxes on their earnings. Under the new plan, using the House brackets, the tax bracket drops to 25% and the payment to $375.
Not huge money, but it’s still something. The bigger impact will come from the changes in the corporate tax rate and the repatriation rates.
Cuts the corporate tax rate to 20% from 35% today and lowers the corporate repatriation rate to 10% for cash and 5% for non-cash
These two provisions are lumped together because they both impact the business climate in the United States. Cutting the corporate tax rate increases the earnings of corporate America and we have already seen the effect of this on the stock market. Much of the stock market's movement over the last year has been based on the prospects of the tax plan. Markets and business sentiment are forward looking, and after the election the stock market began to price in a significant cut in corporate taxes. As markets and corporations looked forward to the cut, the economy, which had already been steadily growing, kicked into higher gear, and the stock market and interest rates responded.
The S&P 500 has surged ahead nearly 19% in the last 12 months and GDP growth accelerated to 3.3% in the third quarter, and 3.1% in the second quarter, the first two consecutive months of above 3% economic growth since April and July of 2014. The labor market was already extremely tight, with the unemployment rate at a 17-year low of 4.1%.
American companies have over $2.5 trillion in cash stashed abroad, a strategy that helps them avoid paying the 35% corporate tax. The tax bill will provide an amnesty tax rate of 10% on cash and 5% on non-cash to repatriate funds into the United States. Goldman Sachs analysts believe that at a 12.5% repatriation rate, $250 billion will be brought back into the economy and markets. This money could stimulate the economy via stock buybacks, dividend payouts, capital expenditures, M&A activity, and R&D.
And stimulus certainly won’t hurt savers. Savings and CD rates are pegged to the Federal Reserve’s Federal Funds rate. As the economy accelerates, the Fed raises the Federal Funds to cool growth and prevent inflation. Conversely, when the economy is in recession or growing slowly, the Fed drops rates to try and stimulate the economy and increase growth. Faster growth over a period of time leads to a higher Federal Funds Rate and to higher Savings and CD rates.
Since 2008 financial crisis, the Fed has kept the Fed Funds Rate at close to 0%, precipitating rock bottom rates on savings and CDs. But that started to change in 2015 as the Fed began lifting rates in response to a growing economy that had largely recovered from the financial crisis. The accelerating pace of economic growth over the past two years has prompted the Fed’s Open Market Committee to increase the Federal Funds Rate three times this year, raising the rate from 0.75% to 1.50%, the most recent increase coming on December 13. Savings and CD rates have risen in lockstep.
The tax plan could accelerate these rate increases
GOP lawmakers argue that the combination of cuts in corporate taxes, an increase in disposable earning from the cuts to individual tax rates, and the possible repatriation of some of the $2.5 trillion in cash could further stimulate the economy and force the Federal Reserve to accelerate the increase in the Federal Funds rate.
While the Fed does not endorse the Trump Administration’s belief that the tax cut will result in annual GDP growth over 3%, it does believe the tax cut will provide a “modest lift.” This means that for now, the Fed’s outlook for three additional Fed Funds increased in 2018 remains. As we have seen in the past with the housing bubble and the dotcom boom, The Fed is not omniscient.
Speaking to the Senate Banking Committee on Nov. 28, incoming Federal Reserve Chair Jerome Powell said, "We've been patient in removing accommodation and that patience has served us well...It's time for us to begin normalizing interest rates and the balance sheet."
This normalization could bring the Fed Funds rate up to 4-5% and savings and CD rates to the 6-7% range over the next 24 months. The chart below shows that in periods of high economic velocity, rates rose into the 4-6% range, and in the 1980s, even higher. How long they stay at the level depends on the future performance of the economy.
This is not to say that savers will benefit from all provisions of the plan. The GOP is still working on a compromise between the House version and the Senate’s proposed plan. The change in the tax brackets could sunset after 2025, raising rates back to the existing levels. Some individuals who make more than $200,000 would see their rate bracket increase according to the House plan. The plan could also eliminate deductions for education expenses, mortgage interest and some home mortgage interest deductions. And the plan is forecast to add more than $1 trillion to the deficit.
But for savers, the tax cut, if it spurs higher economic growth, will reinforce and accelerate already strengthening interest rates. Those who rely on the interest from savings accounts and CDs will see higher interest rates and lower taxes on that interest.
Go with online savings accounts
So, how’s the best way for a saver to play the forecast rise in rates? In a rising rate environment, it’s wise to avoid locking money into certificates of deposit. Instead, individuals should place money into high yield savings accounts. Online savings accounts often offer rates comparable to three and four year CDs and the rate will continue to rise along with interest rates.
If you do decide to open a CD, check the penalties for breaking the CD in case rates really shoot up and you want to get your money out. DepositAccount’s Early Withdrawal Calculator can help you determine if you should break the CD.
Seven rates, starting at 10 percent and reaching 37 percent for incomes above $500,000 for singles and $600,000 for married, joint filers.
For joint filers:
10 percent: $0 to $19,050
12 percent: $19,050 to $77,400
22 percent: $77,400 to $165,000
24 percent: $165,000 to $315,000
32 percent: $315,000 to $400,000
35 percent: $400,000 to $600,000
37 percent: $600,000 and above
For single filers:
10 percent: $0 to $9,525
12 percent: $9,525 to $38,700
22 percent: $38,700 to $82,500
24 percent: $82,500 to $157,500
32 percent: $157,500 to $200,000
35 percent: $200,000 to $500,000
37 percent: $500,000 and above
Corporate Tax Rate
Current law: 35 percent
Proposed: 21 percent, beginning in 2018.
Corporate Alternative Minimum Tax
Current law: Applies a 20 percent rate as part of a parallel tax system that limits tax benefits to prevent large-scale tax avoidance. Companies must calculate their ordinary tax and AMT tax, and pay whichever is higher.
Proposed: Repealed.
Pass-Through Deduction
Current law: Pass-through businesses, which include partnerships, limited liability companies, S corporations and sole proprietorships, pass their income to their owners, who pay tax at their individual rates.
Proposed: Owners could apply a 20 percent deduction to their business income, subject to limits that would begin at $315,000 for married couples (or half that for single taxpayers).
Standard Deduction
Current law: $6,350 standard deduction for single taxpayers and $12,700 for married couples, filing jointly.
Proposed: $12,000 standard deduction for single taxpayers and $24,000 for married couples, filing jointly.
Individual State and Local Tax Deductions
Current law: Individuals can deduct the state and local taxes they pay, but the value is subject to certain limits for high earners.
Proposed: Individuals can deduct no more than $10,000 worth of the deductions, which could include a combination of property taxes and either sales or income taxes.
Obamacare Individual Mandate
Current law: An individual who fails to buy health insurance must pay penalties of $695 (higher for families) or 2.5 percent of their household income -- whichever is higher, but capped at the national average cost of the most basic, low-premium, high-deductible plan.
Proposed: Repeal the penalties.
Mortgage Interest Deduction
Current law: Deductible mortgage interest is capped at loans of $1 million.
Proposed: Deductible mortgage interest for new purchases of first or second homes would be capped at loans of $750,000.
Medical Expense Deduction
Current law: Qualified medical expenses that exceed 10 percent of the taxpayer’s adjusted gross income are deductible.
Proposed: Reduce the threshold to 7.5 percent of AGI for 2018 and 2019.
Child Tax Credit
Current law: A $1,000 credit for each child under 17. The credit begins phasing out for couples earning more than $110,000. The credit is at least partially refundable to qualified taxpayers who earned more than $3,000.
Proposed: Double the credit to $2,000 and provide it for each child under 18 through 2024. Raise the phase-out amount to $500,000, and cap the refundable portion at $1,400 in 2018.
Estate Tax
Current law: Applies a 40 percent levy on estates worth more than $5.49 million for individuals and $10.98 million for couples.
Proposed: Double the thresholds so the levy applies to fewer estates. The higher thresholds would sunset in 2026.
Just wanted to add that the above is AFTER reconciliation. Senate and House will vote next week.
Do you know if there is an additional deduction amount for over age 65?
Note that not only are the new standard deductions less than double the old, their value is reduced also because the old standard deduction was indexed for inflation and would have increased by at least $100 in 2018 but for tax reform.
The additional standard deduction for those 65 and older and for blind individuals will be gone.
Even more deceptive is the effect of raising the standard deduction. Consider the following example:
Married couple has $15,000 of itemized deductions in 2017. As that exceeds the 2017 standard deduction of $12,600, $15,000 will be the deduction on the couple's return, providing $2,400 more in deductions than the standard amount.
Now suppose that in 2018 the same couple again has $15,000 in itemized deductions. Because the 2018 standard deduction is $24,000, the 2017 benefit the couple has of deduction $2,400 in excess of standard is gone, so the 2018 tax return will show only $9,600 more in deductions than the 2017. So much for a double deduction.
What all this means is that all the talk the wonderful benefit of the so-called doubling of the standard deduction is deceptive. After factoring in the permanent loss of personal exemptions, and the potential to itemize more than the standard deduction, the couple in the example claims an extra $9,600 in deductions and loses 2 x $4,100 in personal exemptions, for an overall net reduction in taxable income of only $1,400. Even at the top tax bracket of 37%, thy save only $518 of tax. If both spouses are 65 or older or are blind as of 12/31/2017, their situation is even worse, because in 2018 they also lose their additional standard deduction ($1,550 per person in 2017, probably $1,600 each in 2018 after inflation indexing). In fact, they would have $1,800 more in taxable income than 2017!
This is a reverse Robin Hood tax plan. Steal from the poor, give to the rich!
The Republican plan would replace all these provisions with a single deduction of $12,000 ($24,000 for married couples.) That's a 15% increase — except for seniors, who get a 3% increase.
Interest rates will likely go up a bit, but they will never outpace the rise of inflation, which thus means that your gains on bank balances will be overwhelmed by higher spending costs. I could easily see the U.S. dollar declining substantially, as our trade deficit continues to grow. There will likely be asset bubbles as in the '2000's, which will ultimately explode to lead to a massive crash and perhaps a Depression. Getting an extra percent or so on your savings is not going to help people to deal with all of that. There should have been no tax bill, but the purpose of the bill is to give a windfall to corporations, and take the money from the middle class, and then from safety net programs. My best guess, with which anyone is free to disagree, is that it will destroy the middle class in this country, and make them a permanent underclass. But again, if you are wealthy, if you own a corporation, or can incorporate yourself, you will do well for a while.
Anyway, for tax year 2016, this is how it compares for my elderly mother:
$11,500 deductions (mostly medical deductions)
$. 4,050 exemption
=============
$15,550 total exemption and deductions
New tax bill:
$12,000 standard deduction
That’s it. $3,550 less tax deductions compared to current tax deductions in 2016.
Do some math and let us know if it changed your mind...
https://www.calcxml.com/calculators/federal-income-tax-calculator?
https://www.calcxml.com/calculators/trump-tax-reform-calculator
When the trickle-down economics "boom" doesn't happen, the Republicans will get "deficit religion" again. Then they'll go after Medicaid, Medicare and Social Security to pay for tax cuts for the rich.
My wife was a registered Republican for decads. This latest stunt made her become a Democrat! She's disgusted with the richest country in the world abandoning it's poorest citizens.
As for the middle class, well you got what you asked for (and, probably deserve). Clinton II was a pretty disgusting choice for President. But, she was the firewall between us and the Republicans.
I read DepositAccounts.com for the latest news! I don’t read it for re-hashed bull****!
Send this guy packing!
We've been generous all our lives but I'm tired of hearing about million dollar mortgages that somehow must be subsidized by others. We also fully support education and gladly pay the required tax. However, not once in my life has anyone ever said, "Thanks for putting my kids through school...my family appreciates it." As you may guess we do not have any offspring.
Last but not least I will put the money Donald put back in my pocket to good use. Better use, I must say, than paying for the unethical behavior of an elected official. Over time people have been subjugated into believing government is the solution when, as Ronald warned, government is the problem. Thankfully, not always. Many thanks to Donald and the Republicans who will vote next week to allow us to keep more of our money for our needs and those around us. Merry Christmas to all.
But every independent, non-partisan analysis of this bill I have seen has stated these general facts: the bill vastly favors the rich over the middle class, the personal tax "savings" are only temporary, the corporate tax savings are permanent, the bill plays favorites with those living in lower-cost states over those in higher-cost states, it's estimated that 7% of the middle class will see their taxes increase with this bill, and ironically (but not surprising) to subsidize these tax cuts for the rich, it will blow a 1.5 BILLION dollar deficit, this from the same party that for years cried at the top of their lungs about how terrible the National Debt was.
You can try to spin it all you want, but people of BOTH parties know EXACTLY WHAT THIS BILL DOES -- send this country's deficit soaring in order to give permanent tax cuts to the weathly.
And along the way some of us will gain and some of us will lose. As evidenced by some of the comments being posted.
A new 1.5 Trillion dollar deficit in order to give the rich another tax break.
For those who think this is a GOOD idea, ask yourself this: how would you feel if it were President Hillary Clinton adding 1.5 TRILLION to the deficit in order to give Wall Streeters and the already rich even more breaks?
No need to answer here. But ask yourself that in the mirror, and try not to lie to yourself when doing so (one knows deep down if one is lying to themselves).
I'd support her in a minute (and I cannot stand her) if she lowered my tax burden. In what mystical world do you envision a democrat reducing taxes? Step back and think about the multi-millionaire democrats preaching to the factory worker that they must pay more and more to fund every liberal agenda. I know they say the opposite (rich people are bad) but the truth is higher taxation for all. Most of the loudmouths are very wealthy people living in gated communities completely shielded from their legislative actions. Trump was elected because enough people finally woke up and said enough is enough. We have six degrees in our two-person household so don't fall prey to the notion that only dummies from the hinterlands voted for Trump.
I did not and would not support her under any circumstances. Not even if she would have lowered my tax burden to zero. There is a great deal more to being President of the United States than lowering income taxes. And Hillary was certainly not the person for the job. Perhaps Donald Trump isn't either, but he was the lessor of the two evils. As it turns out President Trump is better than any Washington "insider" would have been with "politics as usual".
There was a reference to this saying that further stated while even though it may be less, it is still evil. So, it could turn out to be a "lose-lose" situation. Sort of like ending up with either Darth Vader or the Emperor.
And as you say "even though it may be less , it is still evil." I agree.
No wonder our country is in such a turmoil when that was the best people the Democrat and Republican parties could come up with. However I now do believe President Trump is on the right track. I just hope he doesn't get derailed.
I beg you to justify frugal homeowners living in low tax states subsidizing million dollar mortgages in states that want to provide everything to everyone. Two people making $100K; one owns home the other has a million dollar mortgage. Why on earth should the owner subsidize the borrower? If anything is purely political this deduction, along with SALT is. Fairness isn't taking from the frugal and wise and giving it to the spoiled and selfish.
Barring some fairly extreme change in the economy, for my two cents, I would say that the Fed does indeed plan to stop raising rates within a range of 2.5 - 3.0%, give or take a quarter point or so. So we will probably have 4 to 6 more 25 bps rate increases. This would suggest that the highest CD rates we are likely to see could be in the range of about 4% (give or take 25-50 bps). One of these years, we will also be due for our next recession = rates go down. I think it highly unlikely we will see CD rates or rates on any deposit investment exceed 5%. Hope I am wrong.
WSJ reports...
For 2018, the additional standard deduction for people 65 and older is $1,300 for each partner of a married couple and $1,600 for a single person.
Thus, if each spouse is above 65, the additional standard deduction is $2,600 in 2018. If one spouse is 66 and the other is 60, the additional standard deduction is $1,300.
There’s also an additional standard deduction for taxpayers who are legally blind. For 2018, it is $1,600 for a single person and $1,300 for a married taxpayer. If both spouses are blind, the additional standard deduction would be $2,600.
Taxpayers who are elderly and blind can take both additional standard deductions.
Thanks for the information! Originally, the over 65 addition was eliminated but now it's back...and that means we will enjoy over $5,000 in reduced taxes. Go Donald.
I said nothing of the kind and this is the problem with taxes and the associated math. I did not calculate SS percentages; I just took the gross ($100K) and put it through the tax tables in the new and old bills. If SS is a big part of the income then a percentage would be used to REDUCE the gross subject to taxation lowering the effective rate even further.
https://www.calcxml.com/calculators/federal-income-tax-calculator?
Then run this for comparison.
https://www.calcxml.com/calculators/trump-tax-reform-calculator
Old: $11,278
New: $8,739
That's a 22.5% REDUCTION in tax.
Why on earth so many do not want tax relief is truly amazing. The ruling class in Washington (surrounding area is the richest in the nation) has enslaved your mind.
https://www.washingtonpost.com/blogs/govbeat/wp/2013/12/12/the-d-c-suburbs-dominate-the-list-of-wealthiest-u-s-counties/?utm_term=.8270f6a621c1
I have also not heard them complaining that less of their social security is taxable compared to the higher income group.
Nothing gets done in business, politics or life in general without compromise. As I once learned, in the USA we have a terrible political and economic system BUT...it's the best system available on the planet at any price!
Of course not. In 40 years of business and education I can count on one hand those who "do the math" before opening their mouths. Educators, by the way, are some of the worst. Just mention effective tax rate and eyes roll. Ours will drop 2.72%. I'd have to be brain dead to come on this board and complain.
https://www.kitces.com/blog/final-gop-tax-plan-summary-tcja-2017-individual-tax-brackets-pass-through-strategies/
Scroll down until the discussion of LTCGs and QDivs, comparing current law with the proposal. Interesting, no?
Head. The "head" aboard a Navy ship is the bathroom. The term comes from the days of sailing ships when the place for the crew to relieve themselves was all the way forward on either side of the bowsprit, the integral part of the hull to which the figurehead was fastened.
Bottom Quintile: average increase in after-tax income 0.4%
Middle Quintile: 2.9% increase in after-tax income
Top Quintile: 1.6% increase in after-tax income
95th to 99th percentile: 4.1% increase in after-tax income
That said, rather than quibble about "percentages" vs. "actual dollars" the intended subject of my comment, as I addressed in the second half, is that of the growing wealth gap and income inequality. Why? Economic inequality has negative effects on public health, crime, consumer demand, consumer consumption, housing and the environment. Historically large wealth gaps and extreme income inequality have bred feelings of injustice within the lowest of economic classes. Especially when poverty affects basic human conditions, a large wealth gap has preceded rebellion and social unrest. Think the Worlds': revolutions, wars, times of political chaos, rise to power of Hitler, Stalin, etc.
The masses don't need to be duped by anyone, liberals or conservatives.
Married couple earning $30K pay $920 in 2017 and $600 under the new plan. Look at the numbers. They don't pay much to begin with and if you add in children they may even get money sent to them in the form of refundable credits. But, going from 920 to 620 is better than nothing...an almost 35% decrease. Our percentage decrease on vastly greater taxes is around 15%. The bottom line is you can't give a tax break to people who don't pay taxes.
So yes there IS a wealth gap but this isn't necessarily a bad thing as those wealthy folks will just be paying more taxes to subsidize those who don't. There has always been rich people and poor people and nothing is ever going to change that but the poor people here in the U.S. have a higher standard of living than many in the middle class in other countries around the world. Compared to many people on here I would be considered poor yet I live quite well on a small income. You could steal every dollar from every rich person and play robinhood economics(Obamanomics) if you want but you would still end up with poor people because of human nature. Some people are good with money and some folks have to spend every penny and then some. There is no way to "fix" this as it isn't something that needs to be fixed in the first place and it will lead to more unintended consequences if you try. It's just like the circle of life or the food chain some will be dining while others will be the meal. Sure it's ugly but it is also reality. Conservatives understand and embrace this reality while liberals deny that it even exists...........................I'll save some time "this comment has been removed due to violation of our comment policies etc."
Wrong.
This IS a middle class tax cut.
Married, 40K income, 2 kids under 17 RECEIVE $1,200 from IRS.
Married, 50K income, 2 kids under 17 RECEIVE $61 from IRS.
Neither pay any federal tax whatsoever.
And one can only wonder why a simple post is deleted.
Did you run your numbers at
calcxml.com/calculators/federal-income-tax-calculator?
tax rate cut for most expiring at the end of year 2025, it makes me wonder what new tax rates we end up with after year 2025.
Run the numbers on calcxml with two children.
Married couple with 2 children under 17 with SS#
100K income
Std. Deductions 24K
Taxable Income 76K
Tax liability BEFORE child tax credit $8,739
Child Tax credits $4,000
TAX TO BE PAID = $4,739
I really wish people would run actual numbers.
In other tax bill related news....
AT&T announced $1000 bonuses to 200,000 employees
Wells Fargo announced minimum wage of $15/hr.
Under the current tax tables tax = $7,732
Our $5103 tax reduction will suffice.
His name is Grover Norquist.
http://taxplancalculator.com/
Pretty embarrassing Sol.