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Happy New Year! I and my team at DepositAccounts.com wish you and your family a happy, healthy and prosperous New Year. I thank all of you for your support over the last year.
As I mentioned in my review of online savings accounts in 2017, savers finally started to see widespread deposit rate increases in 2017. The increases haven’t been as much as we had hoped for. The federal funds rate increased by 75 bps, but the average savings account rate of the top 10 large internet banks only increased by 33 bps.
Internet Savings Accounts - Will 2018 Be Similar to 2005?
Internet savings account rate hikes may start following the federal fund rate hikes in 2018 now that the federal funds rate has caught up to the internet savings account rates. The year 2018 may be similar to 2005. During the period from 2005 to 2007, internet savings account rates remained close to the federal funds rate as the federal funds rate increased from 2.25% in December of 2004 to 5.25% in June of 2006. As an example, EmigrantDirect began operation in January 2005 with an internet savings account earning 3.00% APY. At that time, ING Direct’s savings account (now Capital One 360 Savings Account) was earning 2.35% APY. By July 2006, EmigrantDirect’s savings account rate had risen to 5.15% APY. ING Direct’s savings account rate reached 4.35% APY by the end of June 2006.
Our study on how consumer deposit rates track with Fed rate changes also suggests that we'll see internet savings account rate increases more inline with the Fed hikes.
CD Rates in 2018?
Another thing to remember about the period from 2005 to 2007 was the compressed yield curve. Long-term CD rates never increased much passed short-term CD rates and savings account rates. For example, in 2007 FNBO Direct was offering a promotional 6% APY on its internet savings account. The best nationally available rate for a 5-year CD was 6.25% APY at PenFed.
Today, the yield curve for deposit accounts isn’t quite that compressed. The top savings account rate is currently 1.65% APY (Colorado Federal Savings Bank’s Premier Savings for new customers with a $50k minimum balance) and the top rate of a 5-year CD that’s nationally available is 2.60% APY (Mountain America Credit Union’s 5-year Term Deposit). Nevertheless, we’ve seen savings account rates rise more than 5-year CD rates in 2017. I wouldn’t be surprised to see that continue into 2018.
Future Fed Rate Hikes
Even though there may be similarities between 2005 and 2018, it’s almost certain that we won’t see eight Fed rate hikes like we saw in 2005. The best bet currently appears to be three rate hikes, each 25 bps. The Fed’s dot plot that it released after its December meeting points to three.
Few had much faith in the Fed and its projections in 2016 when we had only one Fed rate hike after the dot plot released in December 2015 indicated four rate hikes. This year is different. The Fed got it right in 2017. The dot plot in December 2016 indicated three rate hikes, and that is what actually happened.
What are the chances that the Fed will call it right two years in a row? Based on the Fed’s history in the last decade, we have reason to predict fewer than three rate hikes in 2018. On the other hand, there are reasons to be optimistic that the Fed will hike more than three times. Tax reform, cuts in regulation and other fiscal policy changes could spur the economy into strong growth. If the economy surprises on the upside, four Fed rate hikes (one after every other Fed meeting) is quite possible. Another reason to be optimistic is the new Fed Chair and the new Fed voting members. They may not be as hawkish as we would like, but they should move the Fed to be at least slightly more hawkish than it was in 2017.
Economist Tim Duy reviews what we may see in the economy and at the Fed in 2018 in this Bloomberg article. He concludes that “the Fed will find more reasons to hike rates than hold steady in 2018, leaving the current three hike projection as the best bet.”
How many Fed rate hikes will there be in 2018?
Last January, I asked readers to take a poll predicting the number of Fed rate hikes we would see in 2017. Many DA readers were on the mark with 30% predicting three rate hikes. Most were pessimistic with 40% predicting two rate hikes, 12% predicting one rate hike and 3% prediction no rate hikes.
Let’s try again with a new poll. Do you think the three rate hikes that are suggested in the Fed’s dot plot are too optimistic? Will 2018 be a repeat of 2017 with three rate hikes? Will strong economic growth surprise the Fed forcing them to hike four or more times? Or will the Fed return to its pre-2017 ways and find reasons to avoid rate hikes? Please make your guess in the poll.
In a future post I will review some deposit account strategies and tips that may be useful for savers in 2018.
So now Ken is writing about the possibility of this same scenario repeating over and over in 2018. If it does my interest rate will be well above 3% and I will be smiling uncontrollably.
God bless Ken, God bless our Federal Reserve, and God bless the United States of America!
Or 6% Series EE U.S. Savings Bonds and 12%+ U.S. Treasury Issues.
Understood. I was around during those much higher CD interest rate days. It was back then just as you assert.
But I was also around, PRIOR to those days, when interest rates were far lower, much as they are today. Bottom line:
Interest rates vary over time and vary with the times. We much do our best, regardless prevailing rates, to maximize our returns. This is how things are and will remain . . . until somebody out there comes up with a working time machine.