Federal Reserve, the Economy and CD Rate Forecast - June 18, 2019


The Fed’s two-day meeting started today. The meeting announcement is scheduled for 2:00 PM EDT Wednesday. Along with the announcement, the Fed will be releasing its quarterly Summary of Economic Projections, which includes the “dot plot” that shows FOMC participants’ expectations of the future federal funds target rate. Following these releases, a press briefing by Fed Chair Jerome Powell will take place. No rate change is expected at this Fed meeting. The “pause” period that began earlier this year will likely continue.

It should be noted that a Fed rate cut on Wednesday can’t be ruled out. One thing that should prevent a rate cut is recent economic data that indicates that growth isn’t slowing down in a significant way. As economist Tim Duy described in his recent Fed Watch blog post:

this past week’s readings on consumer spending and manufacturing suggest the economy is nowhere near teetering into a recession and will give ammunition to the wait-and-see crowd on the FOMC.

Even though the Fed will probably not cut rates, there are expectations that the Fed will change its language in their statement to open the door for rate cuts later this year. Tim Duy predicted this change to the statement:

I expect the Fed will signal that a more dovish stance by replacing “the Committee will be patient” with “the Committee will act as appropriate” to sustain the expansion.

If we see that language change, the odds of a rate cut at the Fed’s July meeting will likely rise. Our best hope to avoid a rate cut is if the June jobs report (that will be released on July 5th) shows strong job growth that offsets the weak May report.

The markets currently view a July Fed rate cut as almost a sure thing. The Fed Funds futures (via the CME FedWatch Tool) are showing odds of 87.7% that the federal funds target rate will be lower after the July meeting. They are showing odds of only 1% that there will be no rate cuts by the December meeting. The odds that the federal funds target rate will be at least 50 bps lower by December are now at 87.0%, up from 79.2% last week.

With the rising odds of Fed rate cuts, yields of Treasury bills have fallen. These short-dated Treasury yields tend to more closely follow federal funds rate expectations. The 1-month Treasury yield had the largest decline, falling 8 bps from two weeks ago. The longer-dated yields weren’t far behind. Both the 5-year and 10-year yields were down by 6 bps. The 5-year yield was at 1.85% yesterday. That’s almost one percentage point lower than it was a year ago.

The 10-2 spread (the difference between the yields of the 10-year and 2-year Treasury Notes) narrowed a bit from two weeks ago. It’s now 23 bps, down from 25 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 6/17/19):

  • 1-month: 2.22% down from 2.30% last week (1.82% a year ago)
  • 6-month: 2.20% down from 2.21% last week (2.07% a year ago)
  • 1-year: 2.03% same as last week (2.35% a year ago)
  • 2--year: 1.86% down from 1.90% last week (2.55% a year ago)
  • 5--year: 1.85% down from 1.91% last week (2.81% a year ago)
  • 10-year: 2.09% down from 2.15% last week (2.93% a year ago)
  • 30-year: 2.58% down from 2.62% last week (3.05% a year ago)

Fed funds futures' probabilities of future rate CUTS by:

  • Jun 2019 - down by at least 25 bps: 19.2% up from 17.5% last week
  • Jul 2019 - down by at least 25 bps: 87.7% up from 78.9% last week
  • Sep 2019 - down by at least 25 bps: 97.2% up from 91.5% last week
  • Dec 2019 - down by at least 25 bps: 99.0% up from 97.1% last week
  • Dec 2019 - down by at least 50 bps: 87.0% up from 79.2% last week
  • Dec 2019 - up by at least 25 bps: 0.0% same as last week

CD Interest Rate Forecasts

As I mentioned last week, the increased odds of Fed rate cuts will only accelerate CD rate cuts. If the Fed changes policy at its meeting by replacing its current “pause” policy to a policy that is preparing the markets for a rate cut, CD rate cuts will almost certainly accelerate.

Fortunately, we are still not seeing any widespread large downward movement in the most competitive direct CD rates, but there have been several small rate cuts, and large rate cuts are becoming more common. Institutions that have recently cut rates include Ally Bank (5-year fell from 3.00% to 2.85%) and Discover Bank (5-year fell from 3.00% to 2.85%). I’ll provide more details in my CD summary later today.

The only way we will see a reversal of these CD rate cuts is if we see a steady stream of strong economic data and rising inflation expectations. That will eventually cause the Fed to return to a hawkish stance. However, if the economy weakens and the Fed starts to hint about a rate cut (or actually cuts rates), CD rate declines will likely accelerate.

With the odds of Fed rate cuts increasing to such high levels, it’s looking more and more likely that the rate hiking cycle is long over. I don’t think it’s wise to wait any longer for higher rates. The highest odds still point to us having reached the peak of this rate hiking cycle. If you want yields of at least 3%, it’s now time to seriously consider mid-term and long-term CDs. If CD rate cuts continue, 3% CDs will soon be gone.

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 two years 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.

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.

Smokeboat   |     |   Comment #1
Wait and see...The magic of compound interest. Thank you old wise ones.
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deplorable 1
deplorable 1   |     |   Comment #4
So when was the last time the FED cut interest rates with a unemployment rate of 3.6%? I may be wrong but I think never would be the correct answer.
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Mike   |     |   Comment #11
#4, the FED works against us, what good is high saving rates if the dollar will be destroyed and all of your (ours) savings and assets with it.
StatisticallyInsignificant   |     |   Comment #21
The number of times the unemployment rate has been 3.6% or lower during non-war times since the creation of the Federal Reserve is far too small to be representative of anything. It's an intellectually dishonest question.
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Robb   |     |   Comment #24
It makes no sense at all to be cutting here...unemployment at 50 year lows, the stock market at/near All Time Highs, wages growing at a 3% clip, etc. The only thing I can see is that the Fed continues to be bullied by the POTUS and they have been caving into that pressure since last November. Let's see what the afternoon brings.
Bill Barr
Bill Barr   |     |   Comment #28
It is ONLY pressure from the President that the Fed has been caving into since last November.
Bore   |     |   Comment #36
Bill Barr and that is a good thing for the country.
Brokered   |     |   Comment #5
If the FED lowers rates this soon, with this economy and unemployment numbers then the game is over for savers. The "window" for peak rates this time around lasted a few short months and collapsed in short order.

Also, stop listening to prognosticators who encouraged you to wait for higher rates. As in the past, those 3.5% CD's are looking pretty good! Now you're told to grab 3% before the sale ends!!
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verblick   |     |   Comment #29
seems more like game over for dollars, better off keeping as few as possible and buying real assets
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deplorable 1
deplorable 1   |     |   Comment #32
The stock market seems to be reading way too much into the FED changing some language in their policy statement. They are somehow thinking this is some type of guaranteed rate cut it is not. If Trump gets a trade deal done with China the stock market will shoot up to new all time highs. This coupled with a 3.6% unemployment rate and there is no need for the FED to be pumping the market.
51hh   |     |   Comment #35
"If Trump gets a trade deal done with China the stock market will shoot up to new all time highs."

However, I doubt that it will ever happen. :) Just me.
Bankity   |     |   Comment #47
The stock market has been trading on emotion since Nov 9th 2016. There is nothing good about that. Trump has not done anything but throw tantrums in his time in office and the world has reacted. That is not leadership.
bobby   |     |   Comment #33
Housing market at all time high prices with these low rates its gonna explode again
Ben   |     |   Comment #34
bobby, buy some land or a house, easy way to make more money than a saving account.
James   |     |   Comment #37
I just came from Australia from a business trip and was curious about what they think about the interest rates while there.
There was an economic commentator at ABC (Australian broadcasting corp) who said the economy is tanking and the real estate prices are plummeting and the only way out was for the RBA (reserve bank of Australia) to continue cutting rates, some are already announced, currently at 1,25%. They had 14 consecutive rate cuts when the interest rate was at 4.75% not long ago. Their thinking is, they want to make it to 0%, same as Europe and stop paying interest on the deposits at the banks.

I think we are lucky here to have some positive rates and worn to people to stop complaining and be happy with what you got.
deplorable 1
deplorable 1   |     |   Comment #38
Well James the interest rates in the rest of the world are having the same effect here. We would be at 5% by now if this wasn't the case. This is one of the problems with the "Global" economy and the creeping Socialism around the globe. If not for Trump we would have negative rates and a recession right now. I'm happy and thankful that we are no longer at 0% but these global forces are worrisome looking forward.
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Brokered   |     |   Comment #41
Considering the worldwide debt associated with fiat currencies we will probably NEVER see 5% CD rates again. Look at one simple instance...student loans. Adults borrowed money to improve their economic lives by getting an advanced education. Statistically, a college educated person earns more during their lifetime than a non-college educated worker. So far so good. YOU borrow money to improve YOUR economic status and YOU agree to payback the loan with interest. But...

Now we have a chorus of supposedly sane people screaming they will FORGIVE YOUR student loan, in effect making other people pay the bill for YOUR DEGREE, for YOUR economic benefit. The moral hazard inherent in these "proposals" is truly mind-boggling and nothing short of attempting to purchase votes by perpetrating fraud on a massive scale. This is one of the logical consequences to fiat currencies. When you can create money on a whim you slowly but surely destroy the value of hard work, thrift and the notion that YOUR DEBTS are YOUR RESPONSIBILITY.

We live in very dangerous times.
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deplorable 1
deplorable 1   |     |   Comment #50
#41: I couldn't agree more brokered. The whole idea of debt forgiveness paid for with my tax dollars is infuriating. As you know I have no college degree because I decided to work and save rather than incur debt and expenses(my choice). Now I'm expected to pay for someone else who decided to incur debt so that they could earn a higher income than I did? What's next I will have to pay their mortgage and car payment too?
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Bill Barr
Bill Barr   |     |   Comment #44
CD rates should be 5% now, It is only due to Trump's bullying and the Fed's caving in that they are not.
BSD   |     |   Comment #45
Bill Barr, If the rates are at 5%, this nation can no longer service the national debt and must declare bankruptcy and that means, all those federal debt notes you think is money will evaporate overnight and you and I all who think that they have accumulated wealth will be burnt to ground.
Bankity   |     |   Comment #48
#45 this is due to the huge tax cuts for the 1%, we are all gonna pay for that - one way or another.
deplorable 1
deplorable 1   |     |   Comment #52
Well Bankity who do you think is going to pay for free healthcare and college? Who pays for welfare, bridge cards, HUD, medicaid, free cellphones etc.? You think Social security and medicare was a good deal? Anything the government gives you is paid for with our tax dollars. So far my tax bracket got cut from 15% to 12% and I have a extra $10,000 in my pocket. Funny how I'm not even near the 1% though.
imagine   |     |   Comment #54
we'll get ya on the stock market tax
L.O.L.   |     |   Comment #55
Now that's funny!
Diogenes   |     |   Comment #57
C'mon, that tax bracket cut didn't gain you anything close to $10K. :-)
deplorable 1
deplorable 1   |     |   Comment #59
@ Diogenes: I suggest you look up the new QBI(Qualified Business Income) deduction. This saved me more than the actual tax cut itself. It allows REIT investors income to be taxed at a lower rate and in some cases 0% for folks like me in the 12% tax bracket. REIT's are a large chunk of my investment portfolio. I was only expecting a $3,000-$4,000 tax cut so this surprised me as well. I love the 1% they pay most of the taxes so I don't have to.
Brokered   |     |   Comment #49
I suggest you look beyond our borders for the answer to lower rates. Trump had no effect at all. Rates are now global and our FED is simply reacting to global forces.
Bill Barr
Bill Barr   |     |   Comment #53
With the state of the economy, inflation and unemployment, rates should be raised, not lowered.
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Why America Failed
Why America Failed   |     |   Comment #58
The country is running trillion dollar deficits under full employment. What used to be called "the business cycle" can no longer be allowed anymore, and the Fed will do everything in its power
to prevent it including immediate ZIRP and more rounds of QE if necessary. Imagine if the economy went into recession, - the deficit would double very quickly. Just like the tax cuts were, any plans to spend more trillions on student loan forgiveness, Medicare for all, and the Green deal are utterly insane, but that's where we're headed. RIP USA.
deplorable 1
deplorable 1   |     |   Comment #60
The sad thing is that nobody is even talking about the debt. The only thing politicians talk about is more and more spending. Trump has talked about saving money on trade deals and other government programs but has not yet said he would use that savings to start paying down the debt. Washington has no stomach for fiscal responsibility in the age of free stuff.
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