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.
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.