At last week’s FOMC meeting, the Fed announced its first 50-bp rate hike since 2000. At the post-meeting press conference, Fed Chair Powell also indicated that this will likely be the start of a series of 50-bp rate hikes with two more occuring in June and July. Fed Chair Powell dismissed the possibility of a 75-bp rate hike by saying that the “75 basis point increase is not something the committee is actively considering.” The rate hike decision in September will likely be based heavily on how inflation and the economy evolve over the next four months. If inflation slows over those months, the Fed is likely to return to 25-bp rate hikes. If inflation accelerates over those months, a 75-bp rate hike becomes more likely.
Another announcement by the Fed at last week’s meeting was that Quantitative Tightening (QT) will begin in June. This QT involves the Fed reducing its asset holdings (also called the Fed’s balance sheet.) Opposite of Quantitative Easing (QE), QT will take money out of the financial system which should put upward pressure on interest rates.
Large rate hikes along with QT are clear signs that tighter monetary policy is accelerating, and that is contributing to intense stock market volatility and a stock market (as measured by the S&P 500) that’s down by more than 16% this year. Fears are growing that there will be a recession. Out of the 14 Fed tightening cycles since 1950, 11 have resulted in recessions.
Recessions typically result in lower inflation and higher unemployment. The Fed then steps in to lower policy rates. If we see stagflation in which inflation remains elevated as the economy slows and unemployment rises, the Fed won’t be able to lower rates. This could be a repeat of the 1970s.
With inflation data being so critical this year to the Fed’s policy decisions, each new monthly inflation report has additional importance. The next inflation report will be released on Wednesday. It’s the Consumer Price Index (CPI) for April, and the consensus is for a month-over-month increase of 0.2% (up 8.1% year-over-year) in the CPI and a month-over-month increase of 0.4% (up 6.1% year-over-year) in the core CPI (via Calculated Risk). An upside surprise in inflation will add to the worry that the Fed is behind the curve on inflation and won’t easily be able to bring inflation back to its 2% target. A few months of this may result in a 75-bp Fed rate hike for later this year.
In the last week, Treasury yields for durations from one year to five years had sizable declines. The 2-year yield had the largest decline, falling 16 bps in the last week. However, both the 1-month and 30-year Treasury yields had gains of 9 bps. The 10-year yield had a slight gain of 2 bps while the 3-month yield had a slight decline of 2 bps.
With the 10-year yield rising while the 2-year yield falling, the 10y-2y spread (the difference between the 10-year and 2-year yield) increased 18 bps, from +19 bps to +37 bps. A negative yield curve, especially a negative 10y-2y spread, raises the concerns that the economy will fall into a recession in the next couple of years. Some economists put more weight on the spread between the 10-year and 3-month yields (the 10y-3m spread) for predicting future recessions. This recent San Francisco Fed paper is the latest research to support 10y–3m spread as the better indicator. That spread continues to be much more positive than the 10y-2y spread, and it increased from last week, rising from 206 bps to 210 bps.
Treasury bills continue to be attractive as an alternative to short-term CDs. The 3-, 6- and 12-month T-bills have yields above the best CDs with similar durations. For longer terms, Treasury yields are still in front of CD yields with similar maturities. However, online bank CDs and credit union CDs are slowly catching up. There are now some direct CDs with yields that are close to Treasury yields.
Odds of Fed Rate Hikes
For the June meeting, the odds of at least a 50-bp rate hike is 100.0%, which is the same as last week. However, the odds of at least a 75-bp rate hike has declined from 27.1% last week to 10.2% today. The Fed Chair’s dismissal of a 75-bp rate hike is definitely reflected in these odds.
For the July meeting, the odds of at least two 50-bp rate hikes by then have declined slightly from 100.0% to 99.2%. The odds that there will be a 75-bp rate hike have declined from 34.2% to 11.8%.
For the September meeting, the odds of at least three 50-bp rate hikes by then have fallen from 82.9% to 52.0%. The odds are higher that the Fed returns to 25-bp rate hikes by September instead of moving to 75-bp rate hikes. The odds of at least one 75-bp rate hike have fallen from 26.3% to 5.4%.
For the December meeting, odds are high that the Fed returns to 25-bp rate hikes after two 50-bp rate hikes. The odds that there will be more than two 50-bp rate hikes by December have fallen from 84.6% to 51.8%.
For the July 2023 meeting, the odds point to only one or two 25-bp rate hikes in the first half of 2023.
These federal funds rate odds are based on 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.
Treasury Yields (Close of 5/10/2022):
- 1-month: 0.57%, up 9 bps from 0.48% last week (0.02% a year ago)
- 3-month: 0.89%, down 2 bps from 0.91% last week (0.02% a year ago)
- 6-month: 1.44% down 1 bp from 1.45% last week (0.04% a year ago)
- 1-year: 2.01%, down 15 bps from 2.16% last week (0.05% a year ago)
- 2--year: 2.62%, down 16 bps from 2.78% last week (0.16% a year ago)
- 5--year: 2.91%, down 10 bps from 3.01% last week (0.80% a year ago)
- 10-year: 2.99%, up 2 bps from 2.97% last week (1.63% a year ago)
- 30-year: 3.12%, up 9 bps from 3.03% last week (2.32% a year ago)
Fed funds futures' probabilities of future rate changes by:
Jun 15, 2022 - up by at least:
- 50 bps: 100.0%, same as last week
- 75 bps:10.2%, down from 27.1% last week
Jul 27, 2022 - up by at least:
- 75 bps (1 50-bp + 1 25-bp): 100.0%, same as last week
- 100 bps (2 50-bp): 99.2%, down from 100.0% last week
- 125 bps (1 50-bp + 1 75-bp): 11.8%, down from 34.2% last week
Sep 21, 2022 - up by at least:
- 100 bps:(1 50-bp + 2 25-bp): 100.0%, same as last week
- 125 bps (2 50-bp + 1 25-bp): 99.6%, down from 100.0% last week
- 150 bps (3 50-bp): 52.0%, down from 82.9% last week
- 175 bps: (2 50-bp + 1 75-bp): 5.4%, down from 26.3% last week
Dec 14, 2022 - up by at least:
- 150 bps (1 50-bp + 4 25-bp): 100.0%, same as last week
- 175 bps (2 50-bp + 3 25-bp): 97.5%, down from 100.0% last week
- 200 bps (3 50-bp + 2 25-bp): 51.8%, down from 84.6% last week
- 225 bps (4 50-bp + 1 25-bp): 6.4%, down from 31.6% last week
- 250 bps (5 50-bp): 0.1%, down from 5.1% last week
Jul 26, 2023 - up by at least:
- 200 bps: 94.3%, down from 99.3% last week
- 225 bps: 74.3%, down from 93.3% last week
- 250 bps: 42.0%, down from 74.1% last week
- 275 bps: 15.2%, down from 43.3% last week
Deposit Rate Changes and Forecasts
As the Fed embarks on a series of 50-bp rate hikes, online CD rates are surging higher while online savings account rates are mostly just inching up. Most banks that are raising CD rates appear to be seeing the benefit of attracting deposits into CDs with today’s rates, which will likely appear low in just a few more months.
For the popular online banks, the most noteworthy CD rate increases occurred last week at Live Oak Bank. Its CD rates increased between 50 and 75 bps. Its 5-year CD had the largest rate increase (2.00% → 2.75% APY), but even its shorter-term CDs had substantial rate gains. These include the 6-month (0.75% → 1.25% APY), 12-month (1.25% → 1.75% APY) and 18-month (1.40% → 2.00%).
For the major online banks, both Capital One and Ally Bank both had significant CD rate increases.
Capital One increased the rates of its long-term CDs for terms of 2-year (1.60% → 1.70% APY) to 5-year (2.15% → 2.25% APY).
Ally Bank’s 5-year CD APY finally has reached 2%, with an increase from 1.50% to 2.00% last week. The last time it was higher was March 2020 when it was 2.15%. Even though Ally’s early withdrawal penalties are mild, Ally’s shorter-term CDs are more appealing. Noteworthy ones that had rate increases last week include the 20-month Select CD (1.50% → 1.75% APY), 14-month Select CD (1.25% → 1.50% APY) and the 11-month No Penalty CD (0.50% → 0.60% APY). Any Ally customer who has existing No Penalty CDs should consider closing them and opening new No Penalty CDs with the higher rate.
Most of the major credit unions have fallen a little behind the online banks. Alliant Credit Union is starting to catch up. Last week, it made significant CD rate increases. Most noteworthy were its 5-year (2.00% → 2.25% APY), 18-month (1.10% → 1.75% APY) and its 1-year (1.00% → 1.25% APY).
Teachers FCU is also starting to catch up, with its 5-year CD rate being further ahead on the competitive scale (2.00% → 2.50% APY).
USALLIANCE Financial Credit Union appears intent on keeping its 18-month CD Special competitive (1.75% → 1.95% APY). Just two weeks ago, it did a major rate increase on its 11-month No Penalty CD (0.65% → 1.25% APY).
The above CD rates don’t come close to the CD rates at the Department of Commerce FCU. They remained on top, and they increased their lead slightly with a few small rate increases: 5-year (3.03% → 3.05% APY), 2-year (2.80% → 2.81% APY), 1-year (2.12% → 2.15% APY), and 6-month (1.35% → 1.44% APY).
The online CD average yields surged in April. The gains were the largest since I started tracking these averages in 2017.
In April, the average online 1-year CD yield increased 27.5 bps to 1.010%. For the first four months of 2022, the average online 1-year CD yield has almost doubled, rising from 0.508% to 1.010% (a gain of 50.2 bps.)
The average online 5-year CD yield increased even more. In April, the average increased 46.5 bps to 1.696%. For the first four months of 2022, the average online 5-year CD yield has almost doubled, rising from 0.857% to 1.696% (a gain of 83.9 bps.)
I’m only including one to three CD rate changes per institution to avoid an overload of data. All percentages listed below are APYs.
- Dept of Commerce FCU (5y 3.03% → 3.05%, 1y 2.12% → 2.15%)
- First National Bank of America (5y 2.05% → 2.80%, 1y 1.30% → 1.76%)
- Merrick Bank (5y 2.61% → 2.76%, 18m 1.71% → 2.01%, 1y 1.51% → 1.76%)
- Live Oak Bank (5y 2.00% → 2.75%, 18m 1.40% → 2.00%, 1y 1.25% → 1.75%)
- Popular Direct (5y 2.30% → 2.70%, 2y 1.90% → 2.10%, 1y 1.20% → 1.55%)
- Seattle Bank (5y 1.20% → 2.53%, 1y 0.75% → 1.71%)
- Teachers FCU (5y 2.00% → 2.50%, 18m 1.00% → 1.25%)
- Rising Bank (3y 2.15% → 2.35%, 2y Jbo 2.10% → 2.25%, 1y 1.50% → 1.45%)
- Credit One Bank NA (5y 2.20% → 2.30%, 1y 1.55% → 1.75%)
- TIAA Bank (5y 2.00% → 2.30%, 18m 1.30% → 1.60%)
- Capital One (5y 2.15% → 2.25%, 2y 1.60% → 1.70%)
- Alliant CU (5y 2.00% → 2.25%, 18m 1.10% → 1.75%, 1y 1.00% → 1.25%)
- CFG Bank (5y 2.00% → 2.25%, 12m 1.25% → 1.35%)
- AgFed CU (2.00% → 2.25%, 1y 0.90% → 1.05%)
- My eBanc (3y 1.45% → 2.22%, 1.00% → 1.31%, 11m Flex 0.55% → 0.85%)
- Evansville Teachers FCU (5y 2.00% → 2.15%, 2y 1.40% → 1.50%)
- Luana Savings Bank (5y 1.97% → 2.07%, 1y 1.41% → 1.51%)
- First Internet Bank (5y 1.81% → 2.02%, 1y 1.11% → 1.26%)
- Limelight Bank (3y 1.60% → 2.00%, 1y 1.20% → 1.50%, 6m 0.70% → 1.00%)
- Ally Bank (5y 1.50% → 2.00%, 14m 1.25% → 1.50%, 11m NP 0.50% → 0.60%)
- Credit Human CU (5y 1.90% → 2.00%, 1y 1.20% → 1.30%, 1y Liq 0.90% → 1.00%)
- USALLIANCE Financial CU (18m Spc 1.75% → 1.95%)
- Service CU (5y 0.85% → 1.90%, 18m 0.50% → 1.40%, 1y 0.50% → 1.00%)
- My Banking Direct (3y 1.40% → 1.70%, 1y 1.05% → 1.50%)
- TotalDirectBank (5y 0.50% → 1.70%, 1y 0.50% → 1.30%)
- BankUnitedDirect (3y 0.10% → 1.65%, 2y 0.10% → 1.65%, 1y 0.15% → 1.20%)
- Michigan State Univ FCU (4y 1.55% → 1.60%, 6m Jbo 0.80% → 0.95%)
- M.Y. Safra Bank (18m 0.81% → 1.52%, 1y 1.32% → 1.46%)
- LendingClub Bank (1y 1.00% → 1.30%)
- HSBC (2y 1.01% → 1.26%, 1y 0.75% → 1.01%, 6m 0.50% → 0.65%)
- Ivy Bank (1y 0.60% → 1.15%)
I’ll have more discussion of the rate changes in my CD rate summary on Wednesday.
Savings, Checking and Money Market Rates
There was a slight acceleration of online savings account rate increases last week when the Fed did its first 50-bp rate hike. I expect to see more acceleration after the next two 50-bp Fed rate hikes that are anticipated for June and July.
More banks reached 1% last week. The savings accounts of the three noteworthy ones include Bask Bank Interest Savings (0.80% → 1.25% APY), First Foundation Bank Online Savings (0.65% → 1.00% APY), and My Banking Direct High Yield Savings (0.77% → 1.00%). Bask Bank Interest Savings (1.25% APY) is now the highest rate of a liquid account that doesn’t have small balance limitations or direct deposit requirements.
In the last two rate-hiking cycles, Emigrant Bank’s online divisions have been very aggressive with their online savings account rates. Its three online divisions did have rate increases last week, but the new rates are far behind the rate leaders. The three online savings accounts include EmigrantDirect Savings (0.35% → 0.75% APY), DollarSavingsDirect Savings (0.35% → 0.75%) and MySavingsDirect Savings (0.25% → 0.50% APY).
One of the online banks with a long history of competitive rates on its online savings account is SFGI Direct. I first wrote about its online savings account in 2009, and since that time, SFGI Direct has kept the rate competitive. They rarely have been the highest, but they have generally been above the average rate for online savings accounts. The SFG Direct Savings account had its first rate increase since January 2019, with the rate gaining 20 bps to 0.71% APY.
The average online savings account rate had its largest monthly gain since 2019. However, the gain is much smaller than the CD rate gains.
The average online savings account rate increased 4.0 bps in April, rising from 0.501% to 0.541%. So far this year, the average has increased 8.5 bps.
The average online savings account rate fell slightly in 2021, falling 5 bps from 0.51% to 0.46%. That decline occurred in the first half of 2021. There was no net change in the average from June 1st to January 1st.
Our Online Savings Account Index tracks the average rate of ten well-established online savings accounts.
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.
- Bask Bank Interest Savings (0.80% → 1.25%)
- First Foundation Bank Online Savings (0.65% → 1.00%)
- My Banking Direct High Yield Savings (0.77% → 1.00%)
- Luana Savings Bank Insured MM ($750k+ 0.90% → 1.00%)
- Ivy Bank High-Yield Savings (0.70% → 0.85%)
- CFG Bank High Yield MM (0.80% → 0.82%)
- Citizens Access Online Savings (0.50% → 0.75%)
- Popular Direct High Rise Savings (0.50% → 0.75%)
- DollarSavingsDirect Savings (0.35% → 0.75%)
- EmigrantDirect Savings (0.35% → 0.75%)
- SFGI Direct Savings (0.51% → 0.71%)
- TotalDirectBank Direct MMDA (0.50% → 0.60%)
- Wings Financial CU High YIeld Savings (0.45% → 0.55%)
- MySavingsDirect Savings (0.25% → 0.50%)
Economic and Deposit Rate Scenarios for 2022 and 2023
Based on the March Summary of Economic Projections (SEP) dot plot which shows the anticipated federal funds rates of each of the 16 FOMC members, I can summarize these into two scenarios of how rates evolve through 2023. Based on last week’s Fed meeting (which did not include a release of the SEP), it appears the second scenario is more likely to occur. The following will be updated with new scenarios after the next Fed meeting on June 14-15, which will include a release of the SEP.
Note, the dot plot includes rates for 2024 and for the “longer run.” For my scenarios, I’ve decided to focus just on 2022 and 2023. In my opinion, there’s too much uncertainty for 2024 and future years.
My first scenario is based on the median forecast for all 16 Fed officials who participated in the SEP. My second scenario is based on the median forecast for five of the Fed officials with the highest rate forecasts.
My two Fed rate hike scenarios through 2023:
- 2022: 7 rate hikes, 2023: 3 or 4 rate hikes (2yr gain of 250 to 275 bps)
- 2022: 9 rate hikes, 2023: 4 rate hikes (2yr gain of 325 bps)
Note, a rate hike for this analysis is considered a hike of 25 bps. It’s possible that there will be rate hikes of 50 or more basis points. For simplicity, one rate hike of 50 bps may be called two rate hikes. Thus, seven rate hikes in 2022 could be seven 25-bp rate hikes or two 50-bp rate hikes and three 25-bp rate hikes. Since there are only six more scheduled FOMC meetings in 2022, nine rate hikes would likely be two 50-bp rate hikes and five 25-bp rate hikes (one of which has already occurred.)
One thing to note is that each new SEP has brought higher rates in the forecasts. The following shows how the rate forecasts have evolved in the last year. One year ago, the SEP forecasts showed no rate hikes through 2023. Now they show 10 or 11 rate hikes through 2023. So this trend suggests that there will be more rate hikes than shown by today’s SEP. Also, it shows that you shouldn’t have too much faith in these forecasts.
SEP federal funds rate median forecasts from previous FOMC meetings
- Mar 2021: 2022: 0 rate hikes, 2023: 0 rate hikes
- Jun 2021: 2022: 0 rate hikes, 2023: 2 rate hikes
- Sep 2021: 2022: 0 or 1 rate hike, 2023: 2 or 3 rate hikes
- Dec 2021: 2022: 3 rate hikes, 2023: 3 rate hikes
- Mar 2022: 2022: 7 rate hikes, 2023: 3 or 4 rate hikes
How fast will online savings account rates increase?
Based on the 2015-2018 Fed rate hiking cycle, it may take a few Fed rate hikes before we see widespread and significant gains in online savings account rates. Widespread online savings account rate hikes didn’t start until the middle of 2017. In 2017, 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. During the period from June 2017 through 2018 when the Fed raised rates six times, the average online savings account tracked somewhat close to the upper range of the target federal funds rate. The closest it tracked was during the first three of these six rate hikes. In the last three rate hikes, the average online savings account rate didn’t keep up with the Fed rate hikes. The upper range of the target federal funds rate peaked at 2.50% in December 2018. The average online savings account rate peaked at 2.23% in February 2019.
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 high deposit levels and weak loan demand. This is slowly normalizing, and this condition isn’t shared by all banks and credit unions. As we have seen in the last two months with the credit card banks, loan growth has been enough to spur the online divisions of these credit card banks to raise deposit rates.
The third thing that’s different is high inflation that has been rising more than expected. The March SEP showed that Core PCE is forecast to rise 4.1% in 2022. That’s up from 2.7% from the December SEP forecast. The January year-over-year Core PCE was 5.2%. In 2017 and 2018, monthly year-over-year Core PCE never exceeded 2%. High inflation could result in deposit rates that move up faster.
Online savings account and CD rates in 2022 and 2023
If online savings account rates track the federal funds rate as they did in 2018, online savings account rates should be close to the federal funds rate. For scenario #1, that’s between 2.50% and 3.00% by the end of 2023. For scenario #2, that’s between 3.25% and 3.50% by the end of 2023.
In 2018, the highest nationally available CD rates were generally in the low 4% range. One example is the 4% APY 5-year CD at Connexus Credit Union. It lasted less than a month during November 2018. The top 5-year CD yields during 2018 and 2019 at both Navy Federal and PenFed was 3.50% APY. These yields lasted only about a month.
Based on the top 2018 and 2019 CD rates, we could see 5-year CD rates in the range of 4.0% and 4.50% for scenario #1 and 4.75% and 5.00% for scenario #2. Peak 5-year rates could be lower if there are signs of economic weakness. In this case the spread between short-term and long-term rates shrinks and may even go negative. The result is that long-term CD rates won’t be higher than online savings account 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 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. They include rates from both brick-and-mortar banks and credit unions, in addition to online banks. Since brick-and-mortar banks and credit unions greatly outnumber online banks, these averages can be considered brick-and-mortar bank averages.
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. Rates fell at a slower pace in 2021. For most terms, CD rates bottomed out at the end of 2021. The 3- and 6-month CD rates bottomed out in January or February of 2022. Rates are now slowly inching up.