Federal Reserve, the Economy and CD Rate Forecast - May 21, 2019


Fears of a trade war and its impact to the economy continue to worry the markets. The latest concerns about the effects of a trade war were published by analysts at Morgan Stanley. According to this Reuters article, the analysts warned that a “collapse of U.S.-China trade talks and hike in tariffs on Chinese goods would push the world economy toward recession and see the Federal Reserve cut U.S. interest rates back to zero within a year.” The tariffs could also increase prices which would push up inflation, but based on recent inflation history, an economic slowdown would offset inflationary pressures of tariffs. Thus, it would likely result in Fed rate cuts.

The next Fed meeting is scheduled for June 18-19, and we will see if the trade war concerns impact the Fed’s statement and its forecasts. As Economist Tim Duy described in his recent Fed Watch blog post, “Fed officials remain optimistic, especially considering the economy did not fall off a cliff in the first half of 2019 as some feared after the financial turmoil of late last year.” That is keeping the Fed committed to its “patient” policy. Tim Duy noted that “incoming data [...] suggest that activity is slowing,” and with the persistent low inflation, it wouldn’t “take much additional slowing to prompt the Fed to ease policy a notch to help sustain the expansion.” According to Tim Duy, “the odds still favor a cut over a hike” for later this year.

The Fed Funds futures (via the CME FedWatch Tool) continue to show much higher odds of a rate cut than a hike for 2019. On a positive note, the odds of a rate cut did go down from last week. They now show a 63.9% chance of one or more rate cuts by December, that is up from 69.6% last week.

Another Fed policy that can impact rates is its balance sheet. According to this Bloomberg article, “As soon as next year, analysts say the Fed will resume large-scale buying of debt securities -- this time just U.S. Treasuries.” Even though this is not intended to drive down long-term rates (unlike the original QE programs), the article notes that the effect will likely be the same. We may learn a few clues about the Fed’s balance sheet plans on Wednesday, when the Fed releases the minutes from its last meeting.

Treasury yields for maturities of 1-year and longer went up from last week. The 2-year yield had the largest gain, rising 8 bps. The 6-month Treasury yield held steady, and the 1-month yield fell 4 bps. Due to the large yield gain on the 2-year Note, the 10-2 spread (the difference between the yields of the 10-year and 2-year Treasury Notes) narrowed. It’s now 17 bps, down from 22 bps last week. A negative 10-2 spread has a history of preceding recessions. Other parts of the yield curve have returned to positive. The 10-year yield now exceeds the yields of the 1-, 2-, 3- and 6-month Bills.

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

Treasury Yields (Close of 5/21/19):

  • 1-month: 2.37% down from 2.41% last week (1.71% a year ago)
  • 6-month: 2.42% same as last week (2.14% a year ago)
  • 1-year: 2.36% up from 2.32% last week (2.35% a year ago)
  • 2--year: 2.26% up from 2.18% last week (2.58% a year ago)
  • 5--year: 2.23% up from 2.18% last week (2.90% a year ago)
  • 10-year: 2.43% up from 2.40% last week (3.06% a year ago)
  • 30-year: 2.84% up from 2.83% last week (3.20% a year ago)

Fed funds futures' probabilities of future rate CUTS by:

  • Jun 2019 - down by at least 25 bps: 3.3% down from 10.0% last week
  • Sep 2019 - down by at least 25 bps: 34.9% down from 45.7% last week
  • Dec 2019 - down by at least 25 bps: 63.9% down from 69.6% last week
  • Dec 2019 - up by at least 25 bps: 0.0% same as last week

CD Interest Rate Forecasts

It’s still possible that US economic growth won’t be seriously impacted by the tariffs, and that will prevent the Fed from cutting rates. However, if we start to see rate cut signals from the Fed, expect CD rates to fall. As I mentioned last week, the consensus is that we have reached the peak of this rate hiking cycle. That will put a lid on CD rates and prevent any significant upward movement.

We are still not seeing any widespread large downward movement in the most competitive direct CD rates, but there have been several small rate cuts. The latest ones have occurred at CD Bank, Comenity Direct, and Colorado Federal Savings Bank. I’ll have more details in my CD summary later today.

I don’t think the small CD rate cuts will end until we see a steady stream of strong economic data and rising inflation expectations. That type of condition would lead to increased odds of future Fed rate hikes, and that would put upward pressure on Treasury yields. Rising rates on direct CDs would likely follow. We still have a long way to go before we have a chance of seeing this type of rate increases.

As I’ve been mentioning, if the Fed’s forecasts (from the March meeting) turn out to be true, that will result in at most one more Fed rate hike in 2020. Thus, I don’t think it’s wise to wait any longer for higher rates. The highest odds still point to us having reached the peak of this rate hiking cycle. If you want yields of at least 3%, it’s now time to seriously consider mid-term and long-term 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 in early 2018. One important recent trend to note is that the slope of rising rates has flattened in the last few months.

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.


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Brokered   |     |   Comment #20
Debt to GDP is important. Go back in time and see for yourself.

The trick to any debt is the ability to service it.
Bill Barr
Bill Barr   |     |   Comment #22
The three biggest problems, in order, are inflation, high taxes and low interest rates. Trump is doing nothing to address any of these problems.
#23 - This comment has been removed for violating our comment policy.
dollarsncents   |     |   Comment #24

"Bill Barr is doing a great job so far..............." ?
Mak   |     |   Comment #25
Trump raised the rates from 0% to 2.5%?
Ricochet   |     |   Comment #26
I rarely post but do read most every post.
I 'll beg your pardon that the posters please do not turn this FED Thread into Another Agonizing Off Topic
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