Federal Reserve, the Economy and CD Rate Forecast - April 7, 2020


It’s widely believed that we’re now in a recession due to the COVID-19 pandemic and the nationwide shutdown that it has caused. The main question for future interest rates is how serious will the recession be. The worse the recession, the longer we’ll be in the ultra-low interest rate environment.

Kiplinger Washington Editors just published their opinion on a best-case realistic forecast. Even this best-case forecast is grim. They forecast a GDP decline of 4% for 2020, which is worse than the Great Recession. It also forecast an unemployment rate that will rise to at least 12%, the highest level since 1940. This best-case forecast assumes that the government’s restrictions on activity begin to abate in May. Then it assumes a strong recovery in the second half of the year.

Of course, how the pandemic evolves will heavily impact the severity and duration of the recession. Also, the fiscal and monetary response will be important. So far the Fed has been able to keep the financial sector running. As economist Tim Duy described in his Bloomberg opinion piece:

To its credit, the Federal Reserve quickly adopted a “whatever it takes” strategy to keep the financial sector intact, thereby already avoiding one disaster that contributed to the Great Depression.

The Fed has gone into uncharted territory with this support. There is always the risk that there will be unexpected surprises for the Fed that crashes the financial sector even with their “whatever it takes” strategy. That would definitely be one of the worst-case scenarios that would result in a prolonged and severe recession.

As I mentioned in previous weeks, even in a best-case scenario in which the economy starts to recover in late 2020, the Fed will likely keep rates near zero as it did from 2008 to 2015. It may not last seven years, but I think it’s likely to last at least two to three years.

The one thing different this time is that the Fed’s “whatever it takes” strategy could have unintended consequences. There is some risk that all the monetary and fiscal stimulus could spark high inflation, and that could force the Fed to hike rates quicker. I still don’t think this is a high probability based on recent history.

Most of the Treasury yields did increase from last week, which, like the recent gains in the stock market, is a sign of rising optimism. The 1-year T-bill had the largest yield gain, rising 6 bps from last week. The long-dated maturities had slight declines. The 10-year yield fell 3 bps to 0.67%, and the 30-year fell 4 bps to 1.27%.

The Fed Funds futures via the CME FedWatch Tool now have little to show. As you might expect, the implied probability of the target federal funds rate remaining at its current 0-0.25% level is 100% for the rest of the year. The futures extend out to March 2021 with the implied probability remaining at 100% that the target holds at 0-0.25%. The futures continue to show zero odds of negative rates.

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

Treasury Yields (Close of 4/6/20):

  • 1-month: 0.09% up 5 bps from 0.04% last week (2.42% a year ago)
  • 3-month: 0.15% up 3 bps from 0.12% last week (2.44% a year ago)
  • 6-month: 0.17% up 5 bps from 0.12% last week (2.46% a year ago)
  • 1-year: 0.20% up 6 bps from 0.14% last week (2.43% a year ago)
  • 2--year: 0.27% up 4 bps from 0.23% last week (2.35% a year ago)
  • 5--year: 0.44% up 5 bps from 0.39% last week (2.31% a year ago)
  • 10-year: 0.67% down 3 bps from 0.70% last week (2.50% a year ago)
  • 30-year: 1.27% down 4 bps from 1.31% last week (2.91% a year ago)

Fed funds futures' probabilities of future rate changes by:

  • April 2020 - no change: 100.0%
  • June 2020 - no change: 100.0%
  • Dec 2020 - no change: 100.0%
  • Mar 2021 - no change: 100.0%

CD Interest Rate Forecasts

There were widespread CD rate cuts as April began, but there weren’t as many cuts as I had feared. Several of the large online banks held steady, and several credit unions didn’t further slash CD rates after slashing rates in March. Nevertheless, we’re seeing fewer 2% CDs. A 2% CD is now rare for online banks, even for 5-year terms. Rates at credit unions are not much higher. There are few more low-2% CDs that remain at credit unions. In another couple of months, 2% CDs may disappear. Hopefully, they won’t become extinct.

As I described last week, not all banks are rushing to slash deposit rates. A pattern that’s similar to what we saw after the 2008 financial crisis is occurring in which some banks see a need to maintain deposits. That has resulted in these banks partially reversing CD rate cuts that were done in March. With the financial support from the Fed, these deposit concerns appear to be easing. Consequently, we’re seeing fewer banks reversing CD rate cuts.

In the following list of CD rate changes from last week, I’ve ordered the list starting with rate hikes, followed by small cuts and ending in either big cuts or low rates. The only significant rate hike I could find was at Banesco USA, which increased its 3-year CD rate by 15 bps to 1.65%. The next three rate changes were at credit unions that only made modest rate cuts to their very competitive rates. The next two rate changes were at online banks that made modest cuts, with new rates still being fairly competitive. The last four rate changes were institutions that either made big cuts or cuts to already low rates. These CD rates are now very disappointing.

Since there were so many rate cuts in the last week, I’m only listing around 10 rate cuts that would be most interesting for DA readers. Also, I’m only including two to three CD rate changes per institution to avoid an overload of data. All percentages listed below are APYs.

  • Banesco USA (3yr 1.50% → 1.65%, 1.75% → 1.50%)
  • Premier America CU (5yr 2.30% → 2.20%, 1yr 1.70% → 1.60%)
  • Hiway FCU (5yr 2.10% → 2.00%, 1yr 1.40% → 1.30%)
  • Keesler FCU (30m Jumbo 2.67% → 2.14%, 21m Jumbo 2.13% → 1.87%)
  • Merrick Bank (2yr 1.95% → 1.82%, 1yr 1.90% → 1.87%)
  • Barclays (5yr 1.85% → 1.70%, 1-yr 1.85% → 1.75%)
  • Navy FCU (5yr 1.80% → 1.50%, 1yr 1.65% → 1.55%)
  • Sallie Mae Bank (5yr 1.45% → 1.35%, 1yr 1.50% → 1.35%)
  • Andrews FCU (7yr 1.40% → 1.35%, 5yr 1.35% → 1.30%)
  • Colorado Federal Savings Bank (5yr 1.75% → 1.25%, 18m 1.25% → 0.90%)

I’ll have more discussion of the CD rate changes later today in my CD summary.

For online savings accounts, most banks continue to cut their rates. The last emergency Fed rate cut that lowered the federal funds rate to the zero bound was just over three weeks ago. Most online banks appear to be following a strategy of stretching out the transition to low rates. A few have decided to act quickly with large cuts. Only one bank, Rising Bank, partially reversed its March rate cut.

During the zero bound years from 2008 to 2015, most online savings account rates bottomed out in a range from 0.70% to 1.00%. Thus, additional cuts are likely in the coming months.

Below are examples of important savings and money market rate changes in the last week. As is the case with the CD rates, I’ve included only around 10 rate cuts from the online savings accounts that DA readers would be most interested in. All percentages listed below are APYs.

  • FitnessBank Fitness Savings 12.5k+ steps (2.10% → 1.90%)
  • Prime Alliance Bank Personal Savings (1.96% → 1.71%)
  • TotalDirectBank Money Market Deposit (1.85% → 1.70%)
  • American Express High Yield Savings (1.70% → 1.60%)
  • WauBank High-Yield Savings (1.70% → 1.60%)
  • Western State Bank High Yield Money Market (1.85% → 1.60%)
  • Rising Bank High Yield Savings (1.50% → 1.55%)
  • Simple Protected Goal Account (1.75% → 1.55%)
  • Quontic Bank Personal Money Market (2.00% → 1.50%)
  • ableBanking Money Market Savings (1.70% → 1.40%)
  • Alliant CU High-Rate Savings (1.60% → 1.35%)

Scenario #1: Pandemic wanes and the economy surges back

It’s possible that the COVID-19 pandemic turns out to be less of a shock to the economy than current expectations. If that occurs, the U.S. avoids a major recession, and the economy surprises on the upside later this year.

As I described above, even if this best-case economic scenario takes place, it seems unlikely rates will rebound quickly. The Fed moved quickly to the zero bound, and it appears prepared to keep it there for several months after the economy recovers. It’s possible that rising inflation could force the Fed to hike rates, but recent history on inflation doesn’t support that. My guess for this best-case scenario is that the Fed goes back to rate hikes in 2023. This had been 2022 last week, but based on forecasts that I’m seeing, 2022 appears overly optimistic now.

Scenario #2: Economy falls into a major recession and CD rates remain low for years

I’m afraid the odds of this scenario keep rising as the COVID-19 impact to the U.S. economy continues to grow. If we start to see major bankruptcies and panic in the financial markets, the odds of a severe recession increases. If a major recession does occur, the Fed will likely follow a path similar to the one it took after the 2008/2009 recession. It may not take seven years of the zero bound before we see the next Fed rate hike, but in this #2 scenario, it will likely take at least five years for the U.S. economy to recover to the point in which the Fed will start hiking again.

Future Rates and CD Term Decisions

Now that the Fed has returned rates to the zero bound, we can look to the last zero bound years from 2008 to 2015 to help predict what we’ll see in deposit rates. During those years, it did become difficult to find long-term CD rates over 2%, but there were a few rare times when 3% CDs became available. PenFed’s 2013 CDs are an example. I doubt we’ll see any 3% CDs for a while, but that could change in 2021 even if the Fed remains at the zero bound.

Long-term CDs are making more sense as we appear to be headed back into a long period of very low rates. However, long-term CDs are becoming less attractive as rates fall.

During the zero bound days from 2008 to 2015, online savings account rates remained in a range of 0.70% to 1.00%. Thus, there was little to gain with CDs that didn’t have yields higher than this. I can’t say for sure if online savings account rates will remain in this range this time. Over the last 20 years, each recession appears to bring with it ever lower deposit rates.

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 the possibility of rising rates, 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 March. The longer-term CDs had the largest rate reduction. The average 5-year CD rate is now close to the average rate five years ago before the first Fed rate hike of the last tightening cycle.

Safety of the Banking System and Your Deposits

Even though the banking industry is in a much better position now than it was in 2008, the crisis is stressing the financial system. Weak banks and credit unions will have a higher chance of failing over the next year. Thus, this is the time to be extra careful that your deposits are within the FDIC and NCUA limits.

  |     |   Comment #1
Like the Dylan song says “ The times they are a changing “
  |     |   Comment #2
Whether all the monetary and fiscal stimulus might trigger high inflation at some point I wouldn't pretend to know given all the interacting variables, but its curious logic to say "recent history" leaves you unconcerned when the amounts are so unprecedented (with much more likely to follow).
That's kind of a placeholder argument, when what I'd like to read is some analysis of what prevented high inflation during the post-financial crisis money creation mania, and how those dynamics could work similarly (or not) on this now much lager scale.
Debby Downer
  |     |   Comment #3
Look elsewhere.
  |     |   Comment #4
RRRRR... found a deal I like except they do a hard pull. Bad policy doing hard pulls on customers who aren't even applying for credit. New customers get their credit scores dinged and most weren't even aware it was coming. Should be prohibited. May not do he deal just because of that.
#5 - This comment has been removed for violating our comment policy.
deplorable 1
  |     |   Comment #11
As I stated in my last post which was deleted we can look forward to 1% or lower rates on liquid accounts in the coming months. This is going to be a tough ride even if the economy recovers quickly which I think it will. The FED doesn't seem to be interested in keeping rates much above 0% for the foreseeable future. CD rates won't fare much better. Money market mutual funds will be losers as well. Those of us with 3-4% add-on CD's should consider ourselves lucky. Bank bonuses are looking better than ever due to very little lost opportunity cost. I started putting cash in the market again at DOW 18,000 to make up for corona stock losses as I believe that may have been the bottom. If the market drops below that point again I will invest more because I don't fight the FED or bet against the U.S. economy long term. Good luck and stay safe folks this too shall pass and remember it's always darkest before the dawn.
  |     |   Comment #12
Dare I ask your rationale for the "quick economic recovery" predicted? It's the darndest thing how so suddenly after Obama left office debt became our dearest of friends rather than the sinister enemy it had been.
#13 - This comment has been removed for violating our comment policy.
deplorable 1
  |     |   Comment #18
My rationale is that we had the strongest economy and stock market in the world just before this virus scare. We shut down our own economy by force not due to any economic conditions. When we reopen the economy it will recover quickly. I don't agree with all the spending and debt. I also don't agree with shutting the entire economy down which necessitated the additional spending(Democrat pork excluded). We should have taken a more measured approach with the economy rather than letting scientists and their inaccurate model projections run the show. If they had their way we would shut everything down indefinitely. At some point Trump will need to stand up and say enough already and start opening things back up. I for one question whether all this was even necessary. I question the mortality numbers and mortality rate. If someone goes into the hospital with several medical conditions including the corona virus how is that death listed? I think this will go down as the biggest over reaction in American history when this is all over and we learn more.
#19 - This comment has been removed for violating our comment policy.
  |     |   Comment #20
Don’t like debt? Who is keeping the debt financed tax cut (remember it’s only for 5 more years...debt stays but lower taxes don’t) AND who is keeping coronavirus checks by not endorsing and returning to US Treasury? You all never saw a debt you didn’t like!
deplorable 1
  |     |   Comment #22
@Choice: So I'm supposed to return that money to the Government? Fat chance. Sorry I'm not complaining about the tax cut which brought about the lowest unemployment in 50 years along with the best economy in the world. It's the unnecessary spending that I disagree with. Also the fact that all politicians don't care about cutting any spending or debt. Then the FED claims no inflation and we have 0% interest rates to infinity for savers in order to finance the debt. Then we are forced into the very risky stock market to seek yield greater than 1%.
  |     |   Comment #23
We see your luv affair with debt which paid for tax cuts AND the treasury checks to be issued shortly. Keep up the loyal opposition to debt...very becoming and supports what we see!
deplorable 1
  |     |   Comment #24
I didn't ask for those checks but I can sure put that money to better use than the government will. Millions for the Kennedy center and WHO. This country wastes more money on absolute junk. If I was president all foreign aid would be gone instantly. Too many bleeding heart politicians is why we have all this debt. Don't put the debt on my shoulders I just pay my taxes and have 0 control over how congress mismanages our money.
  |     |   Comment #25
Since Congress overwhelmingly approved the appropriations are they the bleeding heart politicians to which you refer? And presidents from both parties piled on that debt by signing those bills into law. Actions suggest one really does like this debt...keep up the great postings...they erase all doubt.
  |     |   Comment #26
deplorable 1, you are smart guy, look deeper into the Trump speeches and you will find the answer, do not ever believe the lying media anything. The FED is part of the treasury and no longer can coin money, the treasury has the printing press and Powell report to the new treasury/FED chair, Trump. That is all you need to know for now, otherwise the fake news patrol will delete anything "TRUTHFUL" reported here.
  |     |   Comment #28
But Trump doesn't understand all the words that's written for him in his speeches, so why "look deeper into Trump's speeches and find the answer"
#14 - This comment has been removed for violating our comment policy.
#15 - This comment has been removed for violating our comment policy.
#16 - This comment has been removed for violating our comment policy.
  |     |   Comment #17
Continuing routinely to put out CD money at 3.25% APY. Did two such injections just this week. No drama. Maturities vary between three and a bit less than five years. No funds going into C-rated GTE at this time. Money, instead, deposited into very well rated (B+ and A) financial institutions. Think rating is an important aspect given what American is facing now, with the pandemic.

Would I be locking in five year CDs at 2% APY? Not a chance. I'd be going short instead, with hope pandemic will subside and Trump will have opportunity to reassert his magic in 2021.  Why accept 2% when there are liquid money opportunities out there at 1.7%?

Note above rating references are to Weiss, the toughest and most stringent evaluator of financial institutions out there.  Theirs is the best service of which I'm aware.  But with the uncertainty precipitated by this pandemic, I just hope Weiss is tough enough.  
  |     |   Comment #21
What makes Weiss the "best" Bank rating service you're aware of? How exactly do they make their evaluations and produce the letter grades that result? That's impossible to know by us. They're weighing the same variables as everyone else, but then judging "weakness" or "health" by criteria of their own choosing. Are they most often "right" in the outcome? Again, that defies any
answer. It may be true Weiss grades "toughest" and "most stringent" based on your comparative analysis, and you give special credence to that when choosing an FI for your funds. But understand that from whatever source they derive these grades are not objective, and using them means letting others decide what's more and less important for determining health in whatever ways they do. There's no such thing as "best" in this regard except as a projection of your own individual emotions.
  |     |   Comment #27
Whatever. Suit yourself. And of course I disagree with you. I recall in the past Weiss has been able to ferret out and warn of shaky situations before other services. Their evaluations are not at all forgiving. Weiss has a long standing reputation for ratings toughness. My needs require a ratings DEW line, not a service that signals trouble on the day the NCUA arrives to close and padlock the institution's doors. Feel free to rely on whichever service gives you comfort. I'm most at ease with Weiss Ratings.
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