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.
https://www.bls.gov/news.release/pdf/cpi.pdf
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.
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.
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.
So you agree with Dr Deplorable that the current rate of 3% is real high and the economy is going to crash?
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.
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.
"Normal" is not nor has it ever been 5%. The term normal is relative.
Read this for some clarification...
https://www.marketwatch.com/story/feds-williams-says-normal-interest-rate-around-25-2017-09-22
2017
"“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."
https://www.brookings.edu/2016/?taxonomy=blog&term=ben-bernanke
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.
So, depending on how you structure your investments, you can make money both when interest rates rise or fall.
Ally savings account: https://www.depositaccounts.com/banks/ally-bank.html#rates
FNBO savings account: https://www.depositaccounts.com/banks/fnbo-direct.html#rates
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.