Federal Reserve, the Economy and CD Rate Forecast - November 24, 2020

Tuesday was another record day for the stock market. Both the Dow and the S&P reached record highs. Vaccine optimism contributed to these gains. Also helping the gains was the news that President-elect Joe Biden had selected former Fed Chair, Janet Yellen, to be the next Treasury secretary.

Even with the recent surge of COVID-19 cases, signs are pointing to the continuation of the economic recovery. The concerns that there might be a double-dip recession are falling. Economist Tim Duy described recent good news in the housing market in his FedWatch blog post:

The housing market remains red hot heading in the fourth quarter. Builder confidence pushed to a new record high in November

The strong showing follows on the back of new cycle highs for single family housing starts

Housing is traditionally a solid leading indicator and talk of a double-dip recession is wildly inconsistent with the strength the sector continues to exhibit.

Treasury yields mostly declined from last week. Short-dated yields were only down by 1 or 2 bps. Long-dated yields had larger declines. The 10-year yield fell 3 bps and the 30-year yield fell 6 bps.

The odds of a Fed rate hike through September 2021 continue to be zero. Those odds are indicated by the Fed Funds futures market via the CME FedWatch Tool.

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

Treasury Yields (Close of 11/24/20):

• 1-month: 0.08% down 1 bp from 0.09% last week (1.58% a year ago)
• 3-month: 0.09% same as last week (1.58% a year ago)
• 6-month: 0.10% down 2 bps from 0.12% last week (1.59% a year ago)
• 1-year: 0.11% down 1 bp from 0.12% last week (1.56% a year ago)
• 2--year: 0.16% down 3 bps from 0.19% last week (1.61% a year ago)
• 5--year: 0.39% down 2 bps from 0.41% last week (1.62% a year ago)
• 10-year: 0.88% down 3 bps from 0.91% last week (1.77% a year ago)
• 30-year: 1.60% down 6 bps from 1.66% last week (2.22% a year ago)

Fed funds futures' probabilities of future rate changes by:

• Dec 2020 - up by at least 25 bps: 0.0%, same as last week
• Mar 2021 - up by at least 25 bps: 0.0%, same as last week
• Sep 2021 - up by at least 25 bps: 0.0%, same as last week

CD Interest Rate Forecasts

The number of CD rate cuts held steady from the previous week. When December begins next week, we may get another surge of cuts, especially at credit unions. If the surge of cuts when December begins is smaller than the surges of previous months, that may be a sign that we’re nearing a bottom for CD rates.

We had another major online bank that cut CD rates to disturbingly low levels. There were none last week which provided a hopeful sign. Citizens Access is the major online bank to hold this status this week. Its CD rates were already low. The latest cuts move their rates to disturbingly low levels. Two examples include the rate cuts of Citizens Access’s 1-year CD (0.30% → 0.20%) and 11-month Liquid CD (0.25% → 0.15%). With the rate of the Citizens Access Online Savings Account now at 0.50%, I don’t understand why anyone would open either of these CDs. Even if the savings account rate falls to near zero in the next year, the savings account will likely earn more interest over the next year than either of these CDs.

On a positive note, three institutions had rate hikes in the last week.

Live Oak Bank increased its 2-year CD rate from 0.60% to 0.80%. However, it lowered rates on other terms. The 5-year had the largest cut, falling from 1.00% to 0.50%. Live Oak Bank has done similar rate hikes in the last month. First it increased its 1-year CD rate from 0.60% to 0.80%. Three weeks later, the 1-year rate fell while the 5-year CD rate increased from 0.60% to 1.00%. Based on this trend, expect the 2-year CD rate to fall to 0.50% in December while another CD receives a temporary rate boost.

The rate hikes at two other institutions appear to be less temporary, but the rate hikes are small.

Most noteworthy is the rate hikes at Connexus Credit Union. Rates went up 10 bps on all of its CDs with terms from one to five years. Its 5-year CD yield is back above 1% (1.01% APY).

Since there were so many rate cuts in the last week, I’m only listing rate cuts that are most interesting for DA readers. Also, I’m only including two to three CD rate changes per institution to avoid an overload of data. All percentages listed below are APYs.

• Connexus CU (5yr 0.91% → 1.01%, 1yr 0.61% → 0.71%)
• American 1 CU (5yr IRA 1.26% → 0.85%, 5yr 1.00% → 0.75%, 1yr 0.25% → 0.15%)
• KS StateBank (5yr 0.55% → 0.60%, 1yr 0.25% → 0.30%)
• Discover Bank (5yr 0.70% → 0.60%, 1yr 0.60% → 0.50%)
• Live Oak Bank (5yr 1.00% → 0.50%, 2yr 0.60% → 0.80%, 1yr 0.70% → 0.50%)
• MainStreet Bank (5yr 0.80% → 0.50%, 1yr 0.50% → 0.30%)
• Citizens Access (5yr 0.45% → 0.35%, 1yr 0.30% → 0.20%, 11m NP 0.25% → 0.15%)
• BankUnitedDirect (3yr 0.35% → 0.25%, 1yr 0.60% → 0.50%)

For online savings and money market accounts, more online banks have lowered their rates at or near 0.50%. The latest online banks in this group are Discover Bank and CIT Bank.

The former rate leader, CFG Bank, continues to make small weekly rate cuts to its money market. The latest cut lowered the rate from 0.76% to 0.72%.

HSBC Direct holds the status this week of the most disturbing online savings account rate cut. Its rate fell from 0.30% to 0.15%. This new rate is so low, I don’t see how anyone would want to open the account.

Below are examples of important savings and money market rate changes in the last week. As is the case with the CD rates, I’ve included only rate changes from the online savings accounts that DA readers would be most interested in. All percentages listed below are APYs.

• CFG Bank High Yield Money Market (0.76% → 0.72%)
• Live Oak Bank High Yield Online Savings (0.70% → 0.60%)
• CIT Bank Money Market (0.55% → 0.50%)
• Discover Bank Online Savings (0.55% → 0.50%)
• All America/Redneck Bank Mega MM (0.60% → 0.50%)
• BankUnitedDirect Online Money Market (0.60% → 0.50%)
• TotalDirectBank Money Market Deposit (0.60% → 0.50%)
• HSBC Direct Savings (0.30% → 0.15%)

I’ll have more discussion of the savings and money market rate changes in my liquid account summary later tonight.

Scenario #1-A: Economy recovers slowly

In September, I decided it was time for a new scenario in how the economy and rates recover. In this scenario, the economy recovers, but it’s a slow recovery that takes multiple years before the economic numbers return to the pre-pandemic levels. Based on what the Fed has said, they will wait for inflation not only to reach its 2% target, but they will also wait additional time for inflation to hold above 2%. This results in the Fed maintaining its zero-bound policy for several years. Based on this scenario and the current Fed forecasts, we probably won’t see a Fed rate hike until around 2025.

Scenario #1: Pandemic wanes and the economy surges back

This is my original scenario in which the economy surges back quickly and strongly. This will probably require that the pandemic comes to an end to the extent that people feel safe to reengage in travel and leisure activities. The good vaccine news improves the odds of this scenario. If the vaccine and its distribution are a success and the pandemic ends next year, it is possible that the U.S. economy surprises on the upside next year. We could then reach pre-pandemic economic numbers before the end of 2021.

Once the economy has reached full or near-full recovery, we’ll then have to wait on the Fed to hike rates. Based on its new inflation strategy, it’ll probably take a year or two. So if we see a full recovery by late 2021, it’s possible that the Fed starts hiking rates by the end of 2023. Four out of the 17 Fed policymakers are forecasting such a scenario (per the Fed’s September economic projections).

Scenario #2: Economy falls into a major recession and CD rates remain low for years

As we are seeing, the pandemic may not end anytime soon. The longer the pandemic impacts businesses, the more business closures and permanent layoffs will result. That could lead to a long-term recession in which it could take multiple years before we come close to pre-pandemic employment rates.

There’s also the possibility that the pandemic or another shock will burst the debt bubble, causing an economic meltdown with a wave of business closures and panic in the financial markets. The Fed has so far been able to keep the financial markets running, and I don’t see a significant risk of an economic meltdown happening in the near term.

If a major recession does occur, the period in which the Fed holds rates at the zero bound will likely be longer than what we experienced after the 2008 recession. In that case the zero bound period lasted seven years from December 2008 to December 2015. With the Fed’s new inflation strategy, it may take many years after the recession has long ended before the Fed decides to hike rates. Each year in which inflation remains below 2% may mean an additional year of inflation over 2% before the Fed decides to hike.

Future Rates and CD Term Decisions

Now that the Fed has returned rates to the zero bound, we can look to the zero-bound years from 2008 to 2015 to help predict what we’ll see in deposit rates. However, as I described above, we are seeing multiple signs that this zero-bound period will be worse for deposit rates. Nevertheless, the history of the last zero-bound years may be useful.

During the last zero-bound period from 2008 to 2015, it did become difficult to find long-term CD rates over 2%, but there were a few rare times when 3% CDs became available. PenFed’s 2013 CDs are an example.

I doubt we’ll see any 3% CDs for a while. In fact, it looks like 2% CDs will probably be non-existent for the remainder of this year. Now, even 1% CDs have become rare.

These sub 2% and sub 1% CDs could change in 2021 if a strong recovery does take place even if the Fed remains at the zero bound. If scenario #1 occurs and we see a strong economic recovery, banks and credit unions will likely see a surge of loan demand which will require deposits. That will lead to higher CD rates and more CD specials even as the Fed holds rates at zero. A rising stock market also helps this process as investors move their money from cash to stocks.

With at least some possibility of 2% CD specials in 2021 (3% looks unlikely now), locking into long-term CDs with rates near 1% doesn’t seem like a good strategy. If we do start to see 2% CDs in 2021, it’ll be better to keep cash in online savings accounts, reward checking accounts, or no-penalty CDs. Then you’ll be able to jump on those CD specials when they appear.

Long-term CDs now only make sense if we’re headed back into a long period of very low rates. In that case a 1% long-term CD will be better than a top savings account with a rate under 0.50%.

During the zero-bound years from 2008 to 2015, online savings account rates remained in a range of 0.70% to 1.00%. Thus, there was little to gain with CDs that didn’t have yields higher than this. I’m afraid we are now seeing a lower range. A majority of today’s online savings account rates have fallen below the low end of this range.

It’s wise to remember that no one can predict future interest rates. So if you want to keep things simple, a CD ladder of long-term CDs is always a useful strategy for your safe money. If you’re worried about being locked into a low-rate CD if rates start rising, choose long-term CDs with early withdrawal penalties of no more than six months of interest.

CD Rate Trends

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 plunged from March to November. The average rates for CDs with terms of one year and longer are now at 5-year lows. The previous lows occurred five years ago in November 2015. Shorter-term CD rates are still a little above the lows from five years ago. The average savings account rate (0.160%) is also at a 5-year low. The previous low was 0.177% in December 2016.

Safety of the Banking System and Your Deposits

Even though the banking industry is in a much better position now than it was in 2008, the crisis is stressing the financial system. Weak banks and credit unions will have a higher chance of failing over the next year. Thus, this is the time to be extra careful that your deposits are within the FDIC and NCUA limits.