This is my second weekly review of the Fed, the economy and what we can expect of future deposit rates. My weekly summaries will now be focused entirely on deposit rates and deals, and they will be published on Tuesday evenings (My liquid account summary is now available at this link). This change was done to separate the economic and political discussion from the deal discussion. Often economic discussion leads to political discussion, and that can create lots of comments which drown out comments on deals and rates. To avoid that, please limit comments related to the Fed, the economy and politics to these blog posts.
The December Fed meeting is scheduled for next week. The FOMC meeting should end on Wednesday, December 19th. On that Wednesday afternoon, we’ll know if the Fed decided on a rate hike. In addition, we should get important clues about what to expect in 2019 from the FOMC statement, updated economic projections and a press conference by Fed Chair Jerome Powell.
With the recent stock market volatility and signs of a global economic slowdown, a Fed rate hike next week is far from a sure thing. However, it still appears to be a pretty safe bet.
The November jobs report that was released last Friday supports a Fed rate hike. According to this MarketWatch article on the jobs report:
Although hiring fell short of Wall Street expectations, the increase in new jobs was still double the number of people entering the labor force each month.
What’s more, an unexpected surge in hiring in 2018 has knocked the unemployment rate to the lowest level since 1969.
At the same time, the flush of new jobs is contributing to the fastest pay gains for workers in nine years.
Other economic data also supports a December Fed rate hike. That’s what economist Tim Duy described in his recent Fed Watch blog post. He summarized his analysis by saying:
Bottom Line: The data flow clears the way for the Fed to hike next week. The Fed doesn’t need to make any decisions on March yet, so they won’t commit to anything in 2019. That will be interpreted dovishly in this environment. If the data stumbles between now and March, the Fed will take itself off the table, assuming inflation remains quiescent. So far, market volatility by itself is likely not enough to derail next week’s rate hike. The Fed typically wants more to justify a policy change.
Even though the data supports a rate hike next week, Tim Duy admits that the “market participants are picking up on something not in the data.” In short, there is some doubt that the Fed will hike rates next week.
The odds of future Fed rate hikes did drop from last week according to the Fed Fund futures as indicated by the CME FedWatch Tool. However, the odds of a December rate hike are still high at 78.4%. That’s a slight drop from 81.8% last week. Larger drops in the odds were seen for March and June. The odds that the federal funds rate will be up by 50 bps by next March fell from 42.8% to 27.5%. That means the market thinks it’s unlikely we’ll continue with the once-a-quarter rate hike that would result in a December and a March rate hike. The market thinks three once-a-quarter rate hikes are even more unlikely. Those odds are now 10.8%, down from 16.7% last week.
The short-dated Treasury yields were slightly up from last week, but all Treasuries with maturities of six months and longer had yield declines. The longest maturities had the largest declines with the 10-year yield falling 13 bps and the 30-year falling 14 bps. The 2-year yield declined 11 bps, and thus the yield curve (as defined by the difference between the yields of the 10-year and 2-year Treasury notes) flattened some more with only 13 bps difference between the 2-year and 10-year yields.
Treasury Yields (Close of 12/10):
- 1-month: 2.32% up from 2.30% last week (1.14% a year ago)
- 6-month: 2.54% down from 2.56% last week (1.45% a year ago)
- 1-year: 2.69% down from 2.72% last week (1.65% a year ago)
- 2--year: 2.72% down from 2.83% last week (1.80% a year ago)
- 5--year: 2.71% down from 2.83% last week (2.14% a year ago)
- 10-year: 2.85% down from 2.98% last week (2.38% a year ago)
- 30-year: 3.13% down from 3.27% last week (2.77% a year ago)
Fed funds futures' probabilities of future rate hikes by:
- Dec 2018 - up by at least 25 bps: 78.4% down from 81.8% last week
- Mar 2019 - up by at least 50 bps: 27.5% down from 42.8% last week
- Jun 2019 - up by at least 75 bps: 10.8% down from 16.7% last week
Certificate of Deposit Rates
With the 10-year Treasury yield falling further below 3%, the outlook for 4% CDs doesn’t look good, at least in the near term. We’ve seen a few long-term 4% CDs in the last month, but they haven’t lasted long. With the new uncertainty about future Fed rate hikes, banks will likely be less inclined to raise their long-term CD rates.
The difficult question for CD investors is when to lock into long-term CDs. If the Fed surprises us and decides against a December rate hike, it might be time to start to seriously look into at least a few long-term CDs.
One thing to consider if the Fed decides to pause is that CD and savings account rates may not drop quickly. If you look at 2006 when the federal funds rate plateaued at 5.25%, banks and credit unions didn’t substantially reduce their savings and CD rates until the Fed began to cut rates in September 2007. Many good savings account and CD deals came in 2007. For example, at the start of 2007, PenFed was offering 6.25% APY on its CDs with terms from 3 to 7 years. FNBO Direct began its 6% savings account promotion in May 2007. Of course, conditions are quite a bit different now than they were in 2006 and 2007. So banks may be quicker to react to the Fed’s pause than they were in 2006/2007.
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 February 2018.