Federal Reserve, the Economy and CD Rate Forecast - Feb 12, 2019

There were more signs in the last week that the Fed won’t be raising rates anytime soon. In recent speeches, Fed Chair Jerome Powell and other Fed officials have suggested that the Fed will be exercising patience in the first half of this year. As economist Tim Duy described in his latest Fed Watch blog post:

the Fed is sending a very coordinated message that they are on hold through the first half of the year. Now that policy rates are near the estimates of neutral while inflation remains unexpectedly low, central bankers are content to slow down and review their handiwork.

The best chance we have for a rate hike in the second half of this year is if the economic data surprises on the upside. In the speeches, the Fed officials have been optimistic about the economy. If we keep seeing strong economic growth this year and if that results in higher inflation, we may have a decent chance for at least one Fed rate hike in the second half of 2019.

On Wednesday morning, the Consumer Price Index (CPI) for January will be released. The consensus is for a 0.2% increase in the core CPI. Keep an eye on CPI releases this year to see how inflation evolves. Higher inflation will increase the odds of a Fed rate hike.

The odds of any 2019 Fed rate hikes as indicated by the Fed Fund futures are now close to zero. They now show odds of less than 2% of a rate hike by December. The odds that the rate will be lower by December are now 11.6%. In summary, the market definitely believes that we’re at the top of the rate cycle.

If we are at the peak in this rate cycle, that would be very disappointing. The target range of the federal funds rate is now 2.25% to 2.50%. The top of that range is still less than half of what the federal funds rate was from June 2006 to September 2007, the peak of the last rate cycle.

Short-dated Treasury yields (maturities under one year) were up from last week while other Treasury yields (maturities of one year and over) were down. The 10-year yield had the largest decline, falling six bps in the last week. The 10-year yield has declined 15 bps in the last year.

The 10-2 spread (the difference between the yields of the 10-year and 2-year Treasury notes) narrowed slightly, falling from 18 bps to 17 bps. 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 2/11/19):

• 1-month: 2.44% up from 2.39% last week (1.35% a year ago)
• 6-month: 2.51% up from 2.50% last week (1.82% a year ago)
• 1-year: 2.55% down from 2.56% last week (1.93% a year ago)
• 2--year: 2.48% down from 2.53% last week (2.09% a year ago)
• 5--year: 2.47% down from 2.51% last week (2.56% a year ago)
• 10-year: 2.65% down from 2.71% last week (2.86% a year ago)
• 30-year: 3.00% down from 3.03% last week (3.14% a year ago)

Fed funds futures' probabilities of future rate hikes by:

• Mar 2019 - up by at least 25 bps: 0.0% same as last week
• Jun 2019 - up by at least 25 bps: 0.0% down from 4.9% last week
• Sep 2019 - up by at least 25 bps: 2.0% down from 6.0% last week
• Dec 2019 - up by at least 25 bps: 1.8% down from 5.3% last week
• Dec 2019 - down by at least 25 bps: 11.6% up from 9.4% last week

CD Interest Rate Forecasts

With long-dated Treasury yields declining and with the odds of any 2019 Fed rate hike low, banks will have reasons to end CD rate hikes, especially on long-term CDs. In the last couple of months, we have been seeing a steady fall of brokered CD rates. I’ll have more on this in my CD summary later today. Rate trends are often seen first in brokered CDs before they’re seen in direct CDs.

Short-term CD rates will likely hold pretty steady until the odds of a Fed rate hike or cut grows. Long-term CD rates may have downward pressure for some time until we see strong economic data that increases the odds of a Fed rate hike.

If the economic data weakens and the Fed starts to suggest the possibility of rate cuts, we may then see widespread rate cuts on 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 after March 2018.

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.