Federal Reserve, the Economy and CD Rate Forecast - Oct 15, 2019


The recent progress on the trade talks has slightly reduced the odds that the Fed will cut rates again at its October 29-30 meeting. However, the Fed may determine that one more rate cut would be wise based on the risks to the economy that have grown since their last meeting.

The minutes of the last Fed meeting were released last Wednesday, and they showed that the Fed’s concern about the economy has grown since their July meeting:

Participants generally had become more concerned about risks associated with trade tensions and adverse developments in the geopolitical and global economic spheres. In addition, inflation pressures continued to be muted.

The effects of the trade tensions and global developments have been impacting business investment, and the Fed is seeing higher risks for a larger slowdown in the economy:

softness in business investment and manufacturing so far this year was seen as pointing to the possibility of a more substantial slowing in economic growth than the staff projected.

The weaker-than-expected reading in the ISM’s manufacturing sector that came out on October 3rd will keep the Fed worrying about the risks of a manufacturing-driven slowdown.

Also, the CPI report last week showed muted inflation. Core CPI was only 0.1%. That will also make it easier for the Fed to justify a rate cut.

Thanks to a strong September jobs report with the unemployment rate reaching a 50-year low of 3.5%, a Fed rate cut this month is far from a sure thing, and if the good news on the trade talks continues, there’s a decent chance the Fed may decide to hold steady on rates.

The odds of an October Fed rate cut did go down quite a bit from last week, according to the Fed Funds futures markets (via the CME FedWatch Tool). The odds of a 25 bp rate cut at the October meeting fell from 83.9% to 74.3%. The odds that the federal funds rate will be at least 50 bps lower by December is now 24.1%, which is down substantially from 42.1% last week.

Most Treasury yields ended Friday higher than they were on Tuesday (my last Fed review). The 5-year note had the largest yield gain, rising 23 bps to 1.59%. The 10-year yield gain of 22 bps was close behind as was the 2-year yield gain of 21 bps. This resulted in a slight widening of the 10-2 spread (the difference between the yields of the 10-year and 2-year Treasury notes.) The spread is now 13 bps, up from 12 bps last week. A negative 10-2 spread has a history of preceding recessions.

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

Treasury Yields (Close of 10/11/19):

  • 1-month: 1.76% up from 1.69% last week (2.14% a year ago)
  • 6-month: 1.68% down from 1.69% last week (2.44% a year ago)
  • 1-year: 1.67% up from 1.62% last week (2.66% a year ago)
  • 2--year: 1.63% up from 1.42% last week (2.85% a year ago)
  • 5--year: 1.59% up from 1.36% last week (3.00% a year ago)
  • 10-year: 1.76% up from 1.54% last week (3.15% a year ago)
  • 30-year: 2.22% up from 2.04% last week (3.32% a year ago)

Fed funds futures' probabilities of future rate CUTS by:

  • Oct 2019 - down by at least 25 bps: 74.3% down from 83.9% last week
  • Dec 2019 - down by at least 25 bps: 82.6% down from 92.0% last week
  • Dec 2019 - down by at least 50 bps: 24.1% down from 42.1% last week
  • March 2020 - down by at least 75 bps: 11.2% down from 29.7% last week

CD Interest Rate Forecasts

CD rate cuts continue to be common at both banks and credit unions. With the odds of another Fed rate cut in October still high, I expect CD rate cuts to continue.

Below are a few recent examples of CD rate cuts from last week. These focus on the popular institutions and former rate leaders. All percentages are APYs.

  • Ally Bank (5yr fell 10 bps to 2.30%, 1yr fell 10 bps to 2.15%, 11mo fell 5 bps to 2.00%)
  • Capital One (1yr 360 CD fell 10 bps to 2.20%)
  • PenFed (5yr fell 10 bps to 1.85%, 1yr fell 10 bps to 1.70%)
  • Comenity Direct (5yr fell 5 bps to 2.45%, 1yr fell 5 bps to 2.25%)
  • First National Bank of America (5yr fell 15 bps to 2.55%, 1yr fell 10 bps to 2.35%)
  • BrioDirect (1yr fell 15 bps to 2.25%)
  • Quontic Bank (5yr fell 15 bps to 2.25%, 1yr fell 15 bps to 2.25%)
  • WebBank (5yr fell 25 bps to 2.05%, 1yr fell 10 bps to 2.05%)
  • State Farm Bank (5yr fell 15 bps to 2.25%, 30mo fell 15 bps to 2.10%)

The recession scenario is still quite possible. In this scenario, the U.S. economy falls into a recession in the next year, and we return to zero rates. With rates as low as they are, it wouldn’t take much of a recession for the Fed to return to zero rates. For the period when the Fed held rates near zero, CD rates didn’t fall to zero, but it became difficult to find long-term CDs with rates above 2%.

The history of Ally Bank’s 5-year CD rate offers an example of how long-term CD rates responded to the last period of zero rates, Ally Bank’s 5-year CD fell to a bottom APY of 1.50% in 2013. The 5-year APY remained below 2.00% from November 2012 until September 2014 when it reached 2.00% APY. It didn’t rise above 2.00% until April 2017, which was just after the Fed’s third rate hike during its rate hiking cycle.

Based on last month’s Fed meeting and their dot plot, the recession scenario doesn’t appear to be the most likely one. Based on the Fed’s projections, the most likely scenario is one more rate cut followed by a slow return to rising rates. Nine out of the 17 Fed members anticipate that rates will be back to early-2019 levels between 2021 and 2022. If that does occur, CD rates should start rebounding next year.

A third scenario based on recent economic news is an economy that has more of a slowdown than the Fed anticipates, but not enough to become a recession. In that case we may not return to zero rates, but we could see three or four more Fed rate cuts. If that happens, we would probably not see the Fed returning to rate hikes until 2021 at the earliest, and it would then probably take another year for a return to CD rates that we saw in late 2018.

Since it’s unlikely that we’ll see widespread rate hikes in the next year (even if this rate cutting cycle is short), I think it makes sense to allocate more of your savings into mid-term and long-term CDs rather than savings accounts and short-term CDs. If you’re optimistic about the economy, choose mid-term CDs. If you’re less optimistic, choose long-term CDs.

Another thing to consider is what CD rate you are able to obtain. As more and more CD rates fall, it will become difficult to find not only a 3% APY, but even a 2.50% APY. For example, only two banks (not credit unions) currently offer nationally available 5-year CDs with rates above 2.60%. As CD rates fall, the benefit of locking into long-term CDs diminishes, and that’s especially the case if the economy is not headed toward recession.

There continues to be a few credit unions that are still offering 3% CDs, but those credit unions have become rare. Navy Federal’s 5-year CD continues to be one of the few which still offer a 3% APY. There are no longer any banks that I’m aware of that are offering nationally available CDs with yields of at least 3%. Note, to see Navy Federal’s CDs in the CD rate table, click on “Advanced options” in the filter box and click on “Select All”. This will include credit unions in the table that primarily limit membership to select employer groups.

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 are now on the decline.

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.

kcfield   |     |   Comment #1
Ken: As usual, thank you for your comprehensive and helpful insights. I have a question: Of the four types of banking institutions (brick and mortar banks; online banks; brick and mortar credit unions; online credit unions), which of these is quickest to cut savings/CD rates; and which is slowest to do so--in a falling interest rate environment? In Michigan, it seems like local, brick and mortar credit unions are the most patient about cutting interest rates; but wondered if you noticed any pattern on this nationally?
pgroove_fan   |     |   Comment #2
Michigan and Louisiana show up quite often here on DA with attractive APYs on "special" offerings. I rather suspect that there is some local economic phenomenon that has the local FIs aggressively seeking deposits and motivated to hang on to the deposits that they already hold.
kcfield   |     |   Comment #3
PGroove: Some of them are specialty Credit Unions. For example Saginaw Medical requires someone in the house to be in the medical profession. We are members at Michigan Educational Credit Union which is now residence based (living or working in surrounding counties); however they were originally a teachers-only credit union. One downside is that every credit union I have contacted (excepting MECU which doesn't do this), does a hard credit pull on savings and CD applications, which for me is a dealbreaker.
I am not sure if that is a standard practice in other states; but I find it surprising that a financial institution would do a hard pull on a non-loan product.
What's Up?
What's Up?   |     |   Comment #4
What is it so upsetting about a hard pull credit check being done, regardless of who's doing it. So many posters here seem to freak out, see it as a deal-breaker. Why? If you have a good score to begin with, you may only see a brief downturn of a few points.

A major bank did one on me recently, my score dropped down 12 points, and was back to normal within 4 weeks or so. No big deal.
Predatory Depositor
Predatory Depositor   |     |   Comment #7
My understanding is that a hard pull stays on your credit report for 2 years, but generally has no effect on credit decisions after 1 year.
deplorable 1
deplorable 1   |     |   Comment #8
I don't know about others but I like to save my hard pulls for actually applying for credit or at the very least a bonus or deal of some kind. I feel a hard pull is worth about $200 min. of value. Whether that value is applying for a credit union which has regular high rate CD specials or a credit card with a $200+ bonus offer or a 0% no fee balance transfer. A hard pull won't necessarily be a deal breaker but it is a factor to consider particularly if you already have 3-4 on your score already. I need to keep my scores as high as possible because I actually use them to make money. It's best to keep activity spread out a bit because they do take a full 2 years to drop off. The effect hard pulls have on your score is actually minimal compared to things like payment history and total available credit for example.
kcfield   |     |   Comment #9
What's Up: One of the reasons is that credit score is also a major factor in calculating insurance score as well; and insurance score determines whether your home and auto rates go up or down. When my credit score went up to the maximum; my homeowners and auto insurance rates went down rather than up that year, and my insurance agent said that was directly due to my insurance score. Had I opened a savings account with a hard pull at the time my insurance score was being calculated, my rates would have gone up rather than down.
Even though my score was already over 800, rates, according to my agent, go up or down for every 20 point insurance score change. Also, I don't think hard pulls should be done for savings products; and since there are banks and credit unions with competitive rates that do soft rather than hard pulls, I choose to do business with them. I do agree with you that people shouldn't "freak out" over hard pulls, and it is only one of many factors to consider (rates, EWP, bank rating, etc). However, even a short term drop is not always without consequences, as noted above.
deplorable 1
deplorable 1   |     |   Comment #11
@kcfield: Interesting I didn't think it made much of a difference for insurance and loan rates past the 740-760 range. Just another reason that FI's need to stop the practice of hard pulls unless you are actually applying for credit.
Predatory Depositor
Predatory Depositor   |     |   Comment #12
Credit score can affect a lot of things. In the industry I worked, your credit score was part of a background check before you were hired. It could prevent you from getting a job.

10 points off your credit score won't matter much if it starts in the 800s. But if you're on the borderline of qualifying for something it could make all the difference. And for those who are regularly opening accounts to take advantage of deals, multiple hard credit pulls could add up to a significant hit to your score.

I've stated on the site before that I'm not a fan of government over-regulation. And the banking industry is already the most regulated industry in the country. But since we already have all those regulations anyway how about one more that says a financial institution can't do a hard pull on you unless you are applying for a credit product, or some other specific products where it's relevant.

The reason they do the hard pull is to find out what kind of prospect you are for their loan products, because that's where they make their money. But as I've also said before you should be doing the hard pull and them because you're the one lending them your money, not the other way around. Hard pulls are a sneaky policy for an FI to have. Just one more factor to consider when you are evaluating a deal.
Dunmovin   |     |   Comment #13
Spoiler Alert...credit checks are done for new accounts for Patriot Act compliance
Predatory Depositor
Predatory Depositor   |     |   Comment #15
Spoiler alert, an FI doesn't have to do a hard pull to comply with any regulations.
Dunmovin   |     |   Comment #21
May be true but that that is the issue... their safe harbor and clearly their insurer hasn't disapproved the practice given concerns on Patriot Act compliance... "Go along to Get along."
kcfield   |     |   Comment #20
Your comments are spot on. Thank you.
pgroove_fan   |     |   Comment #14
And we wind up, yet again, in Doctor of Credit land.
Ken Tumin
Ken Tumin   |     |   Comment #6
Credit unions seem to be generally slower to react to changing rate environments as compared to online banks. This is primarily for CDs. Credit unions and online banks are the ones which typically offer the best CD rates.
kcfield   |     |   Comment #10
Thanks Ken. Do you discern any difference (with respect to your comments) between different types of credit unions (small vs large; primary online vs primarily brick and mortar)?
Jim   |     |   Comment #16
I have 15 years experience with Pentagon Federal Credit Union. PENFED.
Good service, but they drop sooner and faster and farther than any other financial institution I've been with.
Nothing   |     |   Comment #17
Jim, did u go to annual meeting and/or see annual report on the private regulatory letter sent to them and impact to them? The letter was referred to in a WSJ article probably a year ago and has been referenced on some of these threads
Att   |     |   Comment #18
#16 Penfed is a laggard. They were a leader. I still have 5% CD with them that matures in a couple years and a grandfathered 5% off gas charge card.
What's Up?
What's Up?   |     |   Comment #5
With regards to Ken's Blog, I never thought my 13-month NPCD account paying 2.60% would be better than most 1-5 year cd's. But what do I do when 13 months are up? :( Ten months to go....
Watch the FED
Watch the FED   |     |   Comment #19
This is a FED run economy and it is very dangerous to trust the FED, why, because there were only 2 (two) real recessions in US history, the rest (over twenty) were declared for one reason or another, but it was mostly of political character, to oppose one party in favor of the other, therefore, do not believe the FED talks. Another reason for the FED manipulations of the stock markets is the liquidity they control with the repo scheme. They pull money and then they flood the stock markets with money, pretending that they help the liquidity, but the main issue is the purchase of stocks used as collateral from the banks and large blocks from the wealthy individuals. Such background exchange of money, putts the taxpayer for more debt inserted into the national debt, which means, we the people are paying for the repo bailouts, hidden from the public. This could go on for a while, because the FED said it will be a for few days only when started it, but already a month has passed and no sign of stopping it.

If the end result is a fake recession for 2020, it looks like a political stunt. People who still think the FED is independent, don't, the FED is controlled by the globalists and the globalists want the will of the people to be nullified in 2020 and that is a fact.

deplorable 1
deplorable 1   |     |   Comment #22
It looks to me like the FED is doing a stealth QE4 without a recession.
Dirty Cop Comey
Dirty Cop Comey   |     |   Comment #23
The Fed is getting ahead of the curve and will do whatever it can to keep Trump in office.
Y??   |     |   Comment #24
No, the Fed will do what ever it takes to keep pumping up the stock market. That's where the BIG money is.
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