The Fed’s two-day meeting started today. The meeting announcement is scheduled for 2:00 PM ET Wednesday. In addition to the meeting announcement, the FOMC forecasts will be released. These include the “dot plot” which shows the projections of future federal funds rates. Lastly, at 2:30 PM, Fed Chair Jerome Powell will be holding a press briefing.
No rate change is expected at this Fed meeting. If that happens, it will be the first break of the Fed’s quarterly rate hike pattern. The Fed has been consistently hiking rates after every other meeting since December 2017. The first four rate hikes before December 2017 weren’t regular (Dec 2015, Dec 2016, Mar 2017 and Jun 2017).
So if the meeting goes as expected, it will signal the start of another rate pause in which the Fed follows through on its message of being patient as it waits for more economic data.
One interesting thing to look for is how the Fed’s updated economic projections change. The “dot plot” will likely change and no longer point to two rate hikes in 2019. It may also indicate that a couple of policymakers are expecting a rate cut in 2019. Economist Tim Duy had this to say regarding the dot plots in his Fed Watch blog post:
With growth downshifting, inflation soft, and rising concerns about deteriorating inflation expectations, the Fed has the opportunity to sharply pull down the expected path of rate hike and wipe out the two 2019 rate hikes expected at the December meeting.
The market has already wiped out expectations for any 2019 Fed rate hike. The Fed Funds futures show zero chance of a rate hike in 2019. This is the same as last week. The only change from last week is an increased chance of a rate cut. The futures now show a 25.6% chance that the federal funds rate will be lower by December. That’s up from 19.2% last week.
Treasury yields changed little from last week. The 1-month yield had the largest change, rising 3 bps to 2.47%. The 1-month yield is now higher than the 5-year yield (2.42%) by 5 bps. Fortunately, the 1-month/5-year spread isn’t the metric used to predict recessions. It’s the 10-2 spread (the difference between the yields of the 10-year and 2-year Treasury notes). The 10-2 spread is now 15 bps, down from 16 bps last week. A negative 10-2 spread has a history of preceding recessions.
Treasury Yields (Close of 3/18/19):
- 1-month: 2.47% up from 2.44% last week (1.70% a year ago)
- 6-month: 2.51% down from 2.53% last week (1.99% a year ago)
- 1-year: 2.52% same as last week (2.08% a year ago)
- 2--year: 2.45% same as last week (2.31% a year ago)
- 5--year: 2.42% up from 2.41% last week (2.65% a year ago)
- 10-year: 2.60% down from 2.61% last week (2.85% a year ago)
- 30-year: 3.01% up from 3.00% last week (3.09% 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% same as last week
- Sep 2019 - up by at least 25 bps: 0.0% same as last week
- Dec 2019 - up by at least 25 bps: 0.0% same as last week
- Dec 2019 - down by at least 25 bps: 25.6% up from 19.2% last week
CD Interest Rate Forecasts
If it appears that the Fed will keep rates steady for all of 2019, don’t expect any nearterm rate hikes on CDs. In fact, there will likely be downward pressure on CD rates. We have already seen this downward pressure in the last few months. First, Treasury yields declined in November as economic concerns grew. Then the brokered CD rates declined, and lastly, several direct CD rates declined.
I think it’s likely that this trend will continue, and the more negative economic news we get, the longer this trend will last. As I mentioned in previous weeks, this may continue until we see a steady stream of strong economic data and increased odds of Fed rate hikes. We’ll see on Wednesday how optimistic the Fed is about the economy for 2019.
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.