Federal Reserve, the Economy and CD Rate Forecast - December 7, 2021


The last Fed meeting of the year is scheduled for next week (Dec 14-15), and there will likely be some interesting news from the meeting. First, there are growing expectations that the Fed will announce an acceleration of its tapering of asset purchases. This would result in tapering ending early next year, and that would make it easier for the Fed to pull in rate hikes. The meeting will also include an update to the Fed’s Summary of Economic Projections (SEP). New inflation forecasts and federal funds rate forecasts (i.e. the dot plot) should be interesting.

The November jobs report that was released on Friday was somewhat mixed, but the unemployment rate did fall, and according to this WSJ article, “keeps the Federal Reserve on track to quicken the wind-down of its stimulus programs.” If the unemployment rate keeps falling, the Fed will soon run out of reasons to delay rate hikes. The odds of a Fed rate hike in the first half of next year continues to grow.

On Friday, the Consumer Price Index (CPI) for November is scheduled to be released. According to the Calculated Risk blog, the “consensus is for a 0.7% increase in CPI, and a 0.5% increase in core CPI.”

Banking Industry’s Deposit and Loan Levels

If the Fed hikes rates in late 2022, it may still take awhile before banks respond with higher deposit rates. One factor that could cause banks to respond slowly is their deposit and loan levels.

Since the pandemic began, government stimulus checks combined with lower spending has caused America’s personal savings rate to soar which has increased deposit levels at banks to record high levels. Also, loan balances have fallen. That created the perfect storm for deposit rates, resulting in record low deposit rates. It’s clear that some online banks have been trying to shed deposits by slashing their rates to ridiculously low levels.

The latest data on the overall bank deposit and loan balance levels is provided by the Fed’s weekly data of Assets and Liabilities of Commercial Banks.

Fed data released on December 3rd showed total deposits of $17,892.8 and total loans of $10,606.1 billion. From last week, deposits are up $63.9 billion and loans are up $24.1 billion. From September, deposits are up $350.8 billion and loans are up $148.2 billion.

For the week, deposit growth continues to be stronger than loan growth. Normalization of deposit and loan levels, that will encourage higher deposit rates, will require negative deposit growth and strongly positive loan growth.

Treasury Yields

The rising odds of Fed rate hikes in 2022 can be seen in the large gain in the 2-year Treasury yield. Of all the Treasury yields, the 2-year had the largest gain in the last week, rising 19 bps. The 1-year and 5-year yields also had sizable gains, with the 1-year rising 10 bps and the 5-year rising 8 bps. The 10- and 30-year yields fell, which means that the yield curves are flattening. This flattening is expected as the Fed moves toward rate hikes. However, as warned in this Bloomberg opinion piece, the Fed may have trouble moving forward on rate hikes in 2022 if long-term yields keep falling.

Odds of Fed Rate Hikes

The odds of a Fed rate hike in 2022 and 2023 are up quite a bit from last week. In fact, a rate hike next year almost appears to be a sure thing. This is according to the CME FedWatch tool. The CME FedWatch tool lists implied probabilities of future target federal funds rate hikes based on the Fed Funds futures market. The odds of one or more rate hikes by December 2022 were 99.6%, up from 95.4% last week. That’s pretty close to 100%. The odds that the federal funds rate will be at least 50 bps higher in December 2022 were 94.6%, up from 77.2% last week. A rise of 50 bps could be the result of two 25-bp rate hikes or one 50-bp rate hike.

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

Treasury Yields (Close of 12/07/2021):

  • 1-month: 0.05% down 2 bps from 0.07% last week (0.09% a year ago)
  • 3-month: 0.06% same as last week (0.09% a year ago)
  • 6-month: 0.15% up 5 bps from 0.10% last week (0.10% a year ago)
  • 1-year: 0.31% up 10 bps from 0.21% last week (0.11% a year ago)
  • 2--year: 0.70% up 19 bps from 0.51% last week (0.16% a year ago)
  • 5--year: 1.26% up 8 bps from 1.18% last week (0.37% a year ago)
  • 10-year: 1.48% down 4 bps from 1.52% last week (0.84% a year ago)
  • 30-year: 1.80% down 7 bps from 1.87% last week (1.57% a year ago)

Fed funds futures' probabilities of future rate changes by:

  • Dec 2021 - up by at least 25 bps: 0.0%, same as last week
  • Mar 2022 - up by at least 25 bps: 37.5%, up from 26.8% last week
  • July 2022 - up by at least 25 bps: 86.2%, up from 77.0% last week
  • Dec 2022 - up by at least 25 bps: 99.6%, up from 95.4% last week
  • Dec 2022 - up by at least 50 bps: 94.6%, up from 77.2% last week
  • Feb 2023 - up by at least 25 bps: 99.7%, up from 96.6% last week
  • Feb 2023 - up by at least 50 bps: 95.9%, up from 82.0% last week

Deposit Rate Changes and Forecasts

CD Rates

CD rates continue to slowly rise with long-term CDs having the largest gains.

Most of the noteworthy rate increases have occurred at credit unions. The two most noteworthy ones were at NASA FCU and Consumers CU.

NASA FCU increased the rates for its three CD Specials. Its 49-month Special had the largest increase, rising 10 bps to 1.70% APY. Its 15-month (1.05% APY) and 9-month (0.80% APY) increased 5 bps.

Consumer CU changed its mid-term CD Specials. It introduced 16-month Specials that replaced the 20-month Specials. The shorter-term 16-month CD Specials have much higher rates than the old 20-month Specials. The new rates range from 1.30% APY for a $250k minimum to 1.10% APY for a $250 minimum.

CD rates haven’t risen as much at banks. The most noteworthy increases in the last week was at Comenity Direct which increased the rates of its long-term CDs. The new rates range from 1.10% APY (5-year) to 0.75% (2-year).

November was a big month for online CD rates. The average for online 5-year CD rates increased over 15 bps in November. This is the largest monthly gain since 2018. The average for online 1-year CD rates had a smaller increase (3.2 bps), but it’s also the largest monthly gain since 2018. These recent gains are an acceleration of the gains that we saw in the previous three months. It’s a positive sign that CD rates are likely to keep rising as we move closer to the first Fed rate hike.

These averages are based on the 5-year Online CD Index and 1-year Online CD Index which are the average yields of ten online CD accounts from well-established online banks.

I’m only including one to three CD rate changes per institution to avoid an overload of data. All percentages listed below are APYs.

  • NASA FCU (49m 1.60% → 1.70%, 15m 1.00% → 1.05%, 9m 0.75% → 0.80%)
  • Consumers CU (16m SJbo Spc 1.30% - New)
  • Western Vista FCU (29m Spc 1.20% - New, 5y 0.69% → 0.55%, 1y 0.25% → 0.20%)
  • Comenity Direct (5y 0.85% → 1.10%, 4y 0.80% → 1.05%, 3y 0.80% → 1.00%)
  • Mountain America CU (5y 0.70% → 0.75%, 18m 0.25% → 0.35%)
  • Luana Savings Bank (3y 0.65% → 0.70%, 1y 0.35% → 0.40%)
  • Pen Air FCU (15m AO 0.55% → 0.60%, 1y 0.55% → 0.60%)

Savings, Checking and Money Market Rates

Online savings and money market rate changes have been less common than CD rate changes. For the last two weeks of November, there had been no noteworthy rate changes. That changed for the first week of December, but it’s not much of a change. Customers Bank lowered its Ascent Money Market rate from 0.50% to 0.35%, and Luana Savings Bank made a small increase to its Insured Money Market rate (0.35% to 0.40%).

Online savings account rates haven’t been increasing like online CD rates, and this is also apparent from the online averages. For November, our Online Savings Account Index, which tracks the average rate of ten well-established online savings accounts, finally had an increase. The Index increased 1 bp to 0.456%. For the previous three months, the Index remained at 0.446%. Most of the 2021 declines of this average occurred in the first four months of the year. During this time, the average fell from 0.512% to 0.446%.

Below are examples of important savings, checking 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.

  • Luana Savings Bank Insured MM (0.35% → 0.40%)
  • Customers Bank Ascent MM (0.50% → 0.35%)

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

Economic and Deposit Rate Scenarios for 2022 and 2023

Based on the Fed’s September Summary of Economic Projections (SEP), I’ve updated my scenarios about how interest rates will evolve for the next two years. Based on the SEP dot plot which shows the anticipated federal funds rates of each of the 18 FOMC members, I can summarize these into three scenarios of how rates will evolve through 2023. Of course, this assumes that the Fed won’t be way off on their forecasts. As we saw over the last decade, Fed’s forecasts have to be taken with a big grain of salt.

  1. No Fed rate hikes in 2022, one or two rate hikes in 2023
  2. One Fed rate hike in 2022, three rate hikes in 2023
  3. Two Fed rate hikes in 2022, four rate hikes in 2023

As we learned in 2015 and 2016, it can still be a long time from the first Fed rate hike to when we see significant increases in deposit rates. It took about 18 months after the first Fed rate hike in December 2015 before we started to see widespread deposit rate increases.

One factor that caused the delay was the one year period between the first and second Fed rate hikes. After the first rate hike in December 2015, there were global market and economic problems in early 2016 that caused the Fed to delay further rate hikes until December 2016. Most online savings accounts and short-term CD rates remained flat in 2016. However, many online long-term CD rates fell in 2016.

In 2017, we finally saw the Fed regularly hike rates. The third Fed rate hike occurred in March and the fourth occurred in June. After that third Fed rate hike, we finally saw widespread rate increases on online savings accounts. Those increases were small, but they finally started.

After the fourth Fed rate hike in June 2017, the target federal funds rate range was 1.00%-1.25%. Online savings account rates then started to track the federal funds rate. You can see how the average online savings account rate tracked the federal funds rate in our Online Savings Account Index chart.

The first thing that’s different this time is that deposit rates are much lower than they were in 2015. The major online savings account rates were close to 1%. Today, they’re close to 0.50%. The result of that difference is that it may only take two Fed rate hikes rather than four before we see online savings account rates start inching up.

The second thing that’s different this time is the deposit levels at banks. The government stimulus checks combined with lower leisure spending have contributed to record high deposit levels at banks and credit unions. Most banks don’t need deposits, and thus, they are free to maintain rates at record low levels. Until loan levels rise and deposit levels fall to more normal ranges, banks may not be in a hurry to raise rates after the first few Fed rate hikes.

The third thing that’s different is high inflation that has been rising more than expected. Last December, the Fed had forecasted Core PCE to rise 1.9% in 2022. The September forecast shows Core PCE to rise 2.3% in 2022. This shows that the Fed is starting to worry that the current surge in inflation isn’t entirely transitory. High inflation may force the Fed to act more aggressively than it did in 2016 and 2017, and that may result in deposit rates that move up faster.

Thus, based on history and the current environment, it will likely take two to five Fed rate hikes before we’ll see widespread rate increases to online savings accounts and CDs. There’s no way to know how quickly the Fed will hike rates after liftoff. For the purpose of these scenarios, I’ll assume a range from three to 12 months.

No Fed rate hikes in 2022

In the September SEP, nine of the 18 FOMC members think that there will be no rate hikes in 2022. Only one of those nine think that will continue through 2023. Most of those nine, are forecasting either one or two rate hikes in 2023. In this scenario, the target federal funds rate will be 25 to 50 bps higher than it is today by the end of 2023.

In this scenario, we may start seeing widespread deposit rate increases sometime in 2024.

One Fed rate hike in 2022

Six of the 18 FOMC members anticipate one rate hike in 2022. It can be estimated that those six anticipate three additional rate hikes in 2023. In this scenario, the target federal funds rate will be 100 bps higher than it is today by the end of 2023.

In this scenario, we may start seeing widespread deposit rate increase in the second half of 2023.

Two Fed rate hikes in 2022

The last three of the 18 FOMC members anticipate two rate hikes in 2022. It can be estimated that those three anticipate four additional rate hikes in 2023. In this scenario, the target federal funds rate will be 150 bps higher than it is today by the end of 2023. That would equal the federal funds rate just before the pandemic began in March 2020.

In this scenario, we may start seeing widespread deposit rate increases in the first half of 2023.

Fourth scenario - long period of low rates

In all of the above scenarios, it’s unlikely that we’ll see any widespread deposit rate increases in 2022. There are no signs that the Fed will rush to hike rates. It first has to start the taper process of its asset purchases and complete it sometime in 2022. Then it plans to think about rate hikes. The Fed is prepared for inflation to run over its target, so high inflation is unlikely to force the Fed to hike rates faster than the third scenario that’s described above.

There is a fourth scenario that I’m afraid is not shown by the Fed’s rate forecasts. As we saw in the last decade, the Fed may keep rates lower for a longer period than it anticipates. The pandemic has dragged on longer than many had expected. Also, government policies may be a headwind for the economy. In addition, years of ultra-easy monetary policy have resulted in asset bubbles in the economy. If those bubbles burst and the stock market crashes, the impact to the economy could be another major headwind for the economy.

The fourth scenario is that we don’t see a series of Fed rate hikes through 2024. We may not see any hikes or the Fed may stop after one or two hikes if the economy runs into trouble. This may occur even if inflation runs high. The Fed remains more concerned about high unemployment than high inflation. Stagflation would result, which would be especially difficult for savers who will see their savings lose value as inflation rises.

CD and liquid account decisions

My hopes for CD rate increases in 2021 and 2022 have diminished. There may be an occasional CD special with a rate above 1%, but I would be surprised if we see any nationwide CDs with rates near or above 2%.

CDs with terms of 2+ years are especially unattractive these days, especially when we see the possibility of persistently high inflation. Unfortunately, there are not many better alternatives for your “safe” money. A CD with a 1.35% APY will pay 3x the interest than an average online savings account, assuming rates remain static. There are still a few liquid accounts that have rates at or near 1% without balance limits, but it’s questionable how long their rates will hold. You can also boost your overall yield by using high-yield reward checking accounts. That requires more effort, and there’s risk of rate and balance cap reductions.

Since most CDs don’t provide for much of a rate premium over liquid account alternatives, moving money from matured CDs into liquid accounts may make sense. This is especially the case if you think the Fed will hike rates in 2022. However, as we’ve seen in the past 12 years, rates rarely rise as fast and as high as we expect. The next few years may be different, but you may want to hedge your bets.

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 in 2020. The rates continued to fall in 2021, but at a much slower pace. All rates are at 5-year+ lows. There may be some more slight rate declines, but CD rates should be near or past their bottoms.

  |     |   Comment #1
Ken: Thanks for this comprehensive report. Please consider tracking the specific loan-to-deposit ratio at least monthly because, as you note, Fed rate increases alone will not significantly affect savings interest rates if deposit levels are too high.
  |     |   Comment #2
I don’t know Ken, I have to take exception to some of your premise.

“The meeting will also include an update to the Fed’s Summary of Economic Projections (SEP). New inflation forecasts…”

After 10 months of inflation denial while Americans who save money lost over 6 percent (if you can even believe that number) of their wealth to an inflation tax they constantly claimed was just “transitory” does the Fed really have any credibility left on inflation projections? Or any projections for that matter?

“The November jobs report that was released on Friday was somewhat mixed, but the unemployment rate did fall,…”

I think mixed is far too generous. How useful is the “unemployment rate” as a measure of the success of the job market on employing people when it doesn’t count people who are not looking for work in an environment where the government is actively encouraging people and indeed in many cases FORCING them not to work through vaccine mandates and incentives to take welfare payments instead?

The consensus for November was an expectation of 573,000 new jobs. Instead there were only 210,000 new jobs, only a third of what was expected.

In addition to those who gave up looking for a job after being forced out of work by vaccine mandates or deciding welfare was a better option than working, there were 5.9 million people who want jobs who don’t have them who are not counted as unemployed because they were either not available to work or didn’t actively look for work in the 4 weeks preceding the November survey, up by about 1 million from February 2020. This alone shows the massive hole in the “unemployment rate” statistic as a measure of the success of the economy to get people to work.

The number of long term unemployed in November was 2.2 million which is double the number in February 2020.

The labor force participation rate, a far better measure of how the jobs situation is doing was at 68.8% in November, 1.5 percentage points lower than it was in February 2020 and barely moved in the last 10 months.

The relevant metric that the employment situation should be measured against is where it was prior to the Chinese virus pandemic. America doesn’t move backwards. We need to stop lowering the bar and dumbing down expectations. The question is when is the economy going to continue to thrive and be back in the record territory it was when the pandemic hit. And in my view, by that measure, the November jobs report cannot be characterized as anything but dismal.

You can’t expect to have a thriving economy when the government is pursuing policy after policy to prevent it from thriving. Ignoring the elephant in the room is foolish and extremely dangerous.
  |     |   Comment #3
Your labor force participation rate for 11/21 of 68.8% is incorrect, should be 61.8%. However, when you look at this statistic at the BLS you'll see this number has been pretty flat since 2010. You chose to compare 11/21 vs 2/20 (63.3%) . . . well, gee what happened in early 2020? Due to the pandemic the number fell to 60.2% in 4/20. As far as that rate being a better metric versus the unemployment rate for measuring the job situation, I don't know, but last I knew the Fed used the latter. And as I have stated elsewhere, given the historical average inflation and unemployment rates, currently these numbers support the Fed stopping QE and raising rates significantly higher than 2%. Wouldn't you agree?

Here's an interesting article that helps explain why the labor force rate declined even though the economy appeared to be doing well between 2010 and 2019. The answer is called retirement, due to our aging workforce, not due to welfare or of course the impending pandemic.

  |     |   Comment #4
"Your labor force participation rate for 11/21 of 68.8% is incorrect, should be 61.8%."

That is correct. It was a typo. The entire comment about the labor force participation rate however was based on the correct, 61.8% figure so nothing is changed.
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