Federal Reserve, the Economy and CD Rate Forecast - April 16, 2019


Last week’s release of the March Fed meeting minutes reinforces the likelihood that the Fed will continue its “patience” policy this year without any rate changes. According to the minutes, the majority of the Fed expects to hold rates steady in 2019:

With regard to the outlook for monetary policy beyond this meeting, a majority of participants expected that the evolution of the economic outlook and risks to the outlook would likely warrant leaving the target range unchanged for the remainder of the year.

However, there are a few hawks on the Fed who believe rate hikes could be necessary in 2019:

Some participants indicated that if the economy evolved as they currently expected, with economic growth above its longer-run trend rate, they would likely judge it appropriate to raise the target range for the federal funds rate modestly later this year.

Inflation data from last week didn’t help make the case for rate hikes in 2019. Last week’s release of March Consumer Price Index indicated soft inflation that supports the Fed’s patience policy. Core CPI, that excludes food and energy, increased only 0.1% in March and only 2.00% for the year which was below consensus forecasts. Low inflation can also be seen in the May I Bond inflation rate. As I calculated last week, the rate will be only 1.40%, which is down from 2.32% that was announced last November.

All Treasury yields went up from last week with long-dated yields rising the most. The 5-year yield had the largest gain, rising 10 bps. The 10-year yield was close behind at 9 bps. The 2-year yield increased by only 6 bps, and thus, the 10-2 spread widened by 3 bps to 19 bps. The 10-2 spread is the difference between the yields of the 10-year and 2-year Treasury notes. A negative 10-2 spread has a history of preceding recessions.

The Fed Funds futures continue to show zero chance of any rate hike in 2019. Three weeks ago I changed my summary to focus on rate cut probabilities instead of rate hike probabilities. The good news for this week is that the futures are showing lower odds of a rate cut in 2019 than they did last week. They now show a 41.6% chance of at least one rate cut by December, down from 50.3% last week.

The following numbers are based on Daily Treasury Yield Curve Rates and the CME Group FedWatch.

Treasury Yields (Close of 4/16/19):

  • 1-month: 2.43% up from 2.42% last week (1.64% a year ago)
  • 6-month: 2.47% up from 2.46% last week (1.98% a year ago)
  • 1-year: 2.45% up from 2.42% last week (2.12% a year ago)
  • 2--year: 2.41% up from 2.35% last week (2.39% a year ago)
  • 5--year: 2.41% up from 2.31% last week (2.69% a year ago)
  • 10-year: 2.60% up from 2.51% last week (2.83% a year ago)
  • 30-year: 2.99% up from 2.92% last week (3.03% a year ago)

Fed funds futures' probabilities of future rate CUTS by:

  • Jun 2019 - down by at least 25 bps: 11.3% down from 15.5% last week
  • Sep 2019 - down by at least 25 bps: 26.8% down from 31.7% last week
  • Dec 2019 - down by at least 25 bps: 41.6% down from 50.3% last week
  • Dec 2019 - up by at least 25 bps: 0.0% same as last week

CD Interest Rate Forecasts

We are still seeing more CD rate cuts than rate hikes. The latest internet banks to cut their CD rates are Sallie Mae Bank and Citizens Access. As I mentioned last week, there have been a few months of sustained declines of long-dated Treasury yields and brokered CD rates. Direct CD rates tend to follow moves of brokered CD rates. So it’s likely we’ll keep seeing more direct CD rate cuts in the weeks ahead.

I don’t think CD rate cuts will end until we see a steady stream of strong economic data that causes the Fed to start talking about the possibility of rate hikes.

As I mentioned last week, if the Fed’s forecasts (from the March meeting) turn out to be true, that will result in at most one more Fed rate hike in 2020. Thus, I don’t think it’s wise to wait any longer for higher rates. The odds still seem higher that rates will be falling. If you want yields of at least 3%, it’s now time to seriously consider mid-term and long-term CDs.

The above graph shows the rate trends of the average CD rates. These average rates are based on all the rate data that we have collected over the years. This is an interactive graph. You can choose the term of the CDs (from 3 months to 5 years) and the look-back period (from 3 months to 5 years).

As you can see in the graph, average CD rates for all terms have increased in the last year with the largest gains occurring in early 2018. One important recent trend to note is that the slope of rising rates has flattened in the last few months. In fact, the graph shows some slight declines in rates for all maturities in the last month.

Note: This Fed and economic overview used to be part of my weekly summary, but it will now be a separate post. My weekly summaries will now be focused entirely on deposit rates and deals, and they will be published on Tuesday evenings.

deplorable 1
deplorable 1   |     |   Comment #1
It looks to me like inflation is making a comeback. It's going to be really tough to argue against another rate hike if the current trend continues let alone argue for a rate cut. Just look at the chart from the BLS here:
The stock market is up the last jobs report was amazing with unemployment at a 50 year low and year over year wage increases. My tax return was much bigger than I was expecting and I would imagine I'm not alone. Since most people spend their tax returns I bet consumer spending goes up soon. Oil is near $65 and overall economic activity is stable. This looks like a case of economists looking for data to support their previous calls of no rate hikes and a slowing economy to me.
larry   |     |   Comment #2
It's going to be hard to argue against a rate hike when inflation picks up toward the end of year. We need a 6-9 month CD special of 3.25% or better.
Bill Barr
Bill Barr   |     |   Comment #3
Inflation has made a comeback. There is no plausible argument against another rate hike. The only reason the FED did not continue with their rate hikes is that they caved to Trump. It is really unfortunate that Trump has no idea what he is doing.
RRR   |     |   Comment #11
I think it's a stretch to look at the best economy in at least decades and conclude that President Trump has no idea what he's doing. Having the highest possible interest rates is not the mark of a good economy, in fact just the opposite.
#4 - This comment has been removed for violating our comment policy.
Richardf42   |     |   Comment #12
What is the reason for a rate hike? Who gets the extra money generated by a rate hike?
#13 - This comment has been removed for violating our comment policy.
deplorable 1
deplorable 1   |     |   Comment #14
The theory is that by raising rates it slows down borrowing and spending thus decreasing inflation. When rates are lowered it encourages borrowing and spending and inflation increases. This is why when the economy takes a downturn lower rates are supposed to lead to more economic activity.
As to who gets the extra money us savers and the banks who then charge way more on loans then the pittance they give folks like us.
RRR   |     |   Comment #15
There are lots of benefits, including economic benefits, that everyone gets I'm a strong economy. Up until a couple of years ago what CD investors had for quite some time is poor rates and also a lackluster economy. So they suffered the disadvantages of both. Now the economy is much stronger, so with or without higher rates everyone is still better off.

I'd rather have rates a little lower with a booming economy than rates higher with a stagnant economy. There is a balance of course, but in general, in the long run, you're always better off with the former.
deplorable 1
deplorable 1   |     |   Comment #16
Right and I think that is what Trump is trying to do here not have rates too high and choke off the economy. I hate to admit this because I like high savings rates but have you ever noticed that the economy usually crashes after rates get real high?
Dr Dumb
Dr Dumb   |     |   Comment #17
Is 3% considered a real high rate?
Nothing   |     |   Comment #18
Dumbo...as compared to what? 2009? Yes. 1981? No. When I have to pay more taxes on my Soc Sec income that is when the interest rate is "real high!"
Dr Dumb
Dr Dumb   |     |   Comment #19
Dr Nothing, why are you asking me what is considered a real high rate when Dr Deplorable made the comment? He is the expert!

So you agree with Dr Deplorable that the current rate of 3% is real high and the economy is going to crash?
Nothing   |     |   Comment #20
3% now is high...I think that that is a plateau and with no Fed interest rate adjustments and higher oil prices...it will be "low" rate in 9+ months....
Bill Barr
Bill Barr   |     |   Comment #21
It is low now. Historically, 5% is a neutral rate. Keeping rates this low will lead to inflation, then a recession. When the recession hits, the FED will have no "bullets" with which to fight the recession. Trump's bullying of the FED, and the FED's cowardice, will lead to economic disaster.
111   |     |   Comment #22
Agreed. There seem to be mostly 2 kinds of folks that frequent this site, those who are mainly savers, and those using the "deposit accounts" (CDs, liquid savings, etc.) that this website tracks, as a part of the less-volatile component of their asset allocation plan. The latter group includes me. Each camp has its attractions.

Although I sometimes moan and groan about stagnant rates (because after all this is a site devoted primarily to savers), in the Trump economy, since the rate hikes ended, I've made quite a bit more on the equity side than I've lost in "opportunity cost" on the deposit side. That would have been impossible without a booming economy, i.e., we might have gone into a mild recession, ending equity gains and causing many other problems.

So I'm not really complaining, overall. Now, if folks want to theorize about whether high rates are "better for society, the country, the planet, etc." versus low rates, and all that highly opinionated stuff - you know, the comments that sometimes get deleted here - sorry, that's above my pay grade. I'm here to make (and save) money.
Bill Barr
Bill Barr   |     |   Comment #23
When the recession hits, the stock market, and other risk assets, will suffer. The FED, having kept rates too low for too long, will having nothing with which to get the economy out of recession. The rates are too low to give the FED enough room to make significant enough cuts to get the economy out of recession. That is when the stock market, and other risk assets, will be substantially hurt and will be unable to recover. The FED should be raising rates now, while the economy is strong. Not to do so, will lead to disaster when the recession hits.
Brokered   |     |   Comment #25
Bill Barr...
Nonsense. If the FED cuts to zero like they did for many years the economy does just fine. Even the FED now knows they do not affect the economy as much as once thought. There are a multitude of forces involved and the money supply/rate structure is but one component.

You are trying to argue a pure cause/effect relationship that simply does not exist. You can beat the daylight out of inflation with higher rates but recessions are not quelled alone by lower rates. If the simple arguments were true we'd simply program computers to adjust rates accordingly. Too bad it's not that simple.
Bill Barr
Bill Barr   |     |   Comment #31
Certainly, there are many tools the FED has. But, by far the two most important are the fed funds rate and quantitative easing and tightening. When the economy recovered a few years ago, the FED, later than it should have, began raising the fed funds rate and began unwinding quantitative easing. This was clearly the right thing to do. They were on their way to normalizing rates. A fed funds rate of 5% is neutral. And the FED was headed there. They were also reducing their balance sheet "on autopilot". No one could credibly have argued that they were not on the correct path. Then Trump, thinking that goosing economic growth would somehow improve his chances for re-election, began to bully the FED. When Reagan tried this with Volker in 1984, Volker told Reagan to pound sand. Volker had guts. Unfortunately, Jay Powell has no guts. He and the rest of the FED immediately caved. All of us will suffer in the long run for this appalling display of cowardice.
Brokered   |     |   Comment #32
#31 Bill Barr
"Normal" is not nor has it ever been 5%. The term normal is relative.
Read this for some clarification...
"“I think the overall view that we would be raising rates gradually over the next two years and getting back to a normal level is the one I think I have a lot more confidence in,” said San Francisco Fed President John Williams on Friday, later specifying that normal “is likely to be around 2.5%,” according to Reuters."
Bill Barr
Bill Barr   |     |   Comment #33
The term "normal" definitely is relative. It depends on the economic conditions at any given time. Given the economic conditions that prevail at this time, 5% is normal. Go back and look at Powell's statements last fall when he said "we are a long way from neutral". Amazingly, after a few threatening tweets from Trump, Powell decided we were almost to normal, or neutral. The whole problem is that Trump thinks he needs a super-charged economy to get re-elected, and Powell and the rest of the FED are cowards. We will all pay for this mendacity.
anonymous   |     |   Comment #27
Bill Barr Re #23, Bill Bernanke addressed this in his blog, what policy tools the Fed has left when the fed funds rate is low:


It's a multi-part series of posts in early 2016. After reading it, it became clear that the Fed has a few more tricks up its sleeve even with low interest rates.

But where I agree with you is that the Fed should continue to do something, mainly to address the flattening yield curve that scares everyone (and could scare us into a recession). The Fed doesn't want to reduce its balance sheet, but I think what they should do at least is to buy short-term and sell long-term Treasuries (like a reverse "Operation Twist") to remove the artificial flattening the occurred due to QE.
Mak   |     |   Comment #35
#23.. recessions used to happen every few years but recessions aren't allowed anymore.... it's true, the federal reserve adopted that policy a decade ago....:)
anonymous   |     |   Comment #24
Just to add to 111's comment .... bonds and bond funds appreciated considerably after it became clear that the Fed is on hold. Bonds appreciated several %, and anyone in a decent bond fund would have been compensated for a few year's worth of lower rates ahead.

So, depending on how you structure your investments, you can make money both when interest rates rise or fall.
Jean   |     |   Comment #26
When interest rates were at their lowest (2009?) can someone tell me what yield the online savings accounts were paying? Thanks.
Jean   |     |   Comment #28
I know rates were down for about 8 or 9 years? But don't recall what the actual yield was. I didn't have any CDs or online savings back then.
anonymous   |     |   Comment #29
Jean, they dropped pretty quickly from 6% to about 1.5%, and then more slowly over a few years to about 0.5%-1%. Some good examples with a long rate history that you can look at:
Ally savings account: https://www.depositaccounts.com/banks/ally-bank.html#rates
FNBO savings account: https://www.depositaccounts.com/banks/fnbo-direct.html#rates
anonymous   |     |   Comment #30
Jean, the reason why I remember the 1% interest rate so well is because this is what my reward checking account at a local bank paid for balances above the reward checking tier for most of the last decade. I didn't get any better rate in any of my online savings accounts. So I'd intentionally keep "too much" money in my reward checking account to get the 1%.
Jean   |     |   Comment #34
Thanks very much.
deplorable 1
deplorable 1   |     |   Comment #36
@Jean at the low point I recall that 1% was high yield.
Jean   |     |   Comment #38
Thank you deplorable 1. I sure hope we don't go back to the days of 1% being the highest yield. How did you folks save, or invest, during the low yield years? Where did you park your liquid savings?

The Ally website had a link to this information:
Six-month CD rates hit their all-time high of 17.98 percent in August of 1981; they bottomed out at 0.29 percent in January of 2010.
End the FED
End the FED   |     |   Comment #37
If you can’t afford a home or tiny condo shoebox, ridiculous car prices, increasing insurance costs insane college tuitions and the rising cost of everything..... then I think we have inflation for the last 20 years since Clinton Greenspan decide to run everything on low interest rates. Remember when Green span tried to slow things down to a realistic level? We had cd rates at 6% interest. Then the idiot flipped and lowered rates which led to the situation we are in. The few have been rewarded . The rest of us have been decapitated
Jean   |     |   Comment #39
My CD history doesn't go back very far. The highest CD interest rate I ever had was 5.5%? That was at the PenFed credit union, about 8 years ago. I would love to see that rate again.
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