Federal Reserve, the Economy and Future CD Rates - Dec 11, 2018


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.

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

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.

Brokered   |     |   Comment #1
As a simple example check out the debt problems at GE and AT&T. Then take a peak at student loan debt and defaults. The problem with rising rates is what it eventually does to existing and new debt. The FED can only cause so much pain before the cure begins to exacerbate the problem, which in this case is DEBT. A recession is coming, the market knows it and it cannot be avoided. The world is awash in unsustainable debt.
anonymous   |     |   Comment #25
I agree with what you say. However as a retiree, I still need to pay my bills from interest which has been very low for 10 years. Retirees wouldn't be bailed out!
deplorable 1
deplorable 1   |     |   Comment #2
I'm hoping for a inflationary surprise to the upside. The substantial drop in oil prices was enough to offset the 3.7% unemployment rate and wage increases for now but oil isn't going to be dropping $20 a barrel every month. If there is a uptick in inflation the FED will have no other choice than to continue gradual rate hikes. I'm pretty sure that Powell was told to tone it down and to speak more dovish by the POTUS as a attempt to calm the market. I still think we get 3 rate hikes in 2019.
#20 - This comment has been removed for violating our comment policy.
Fan_of_website   |     |   Comment #3
I concur with Brokered about the debt burden being the primary issue. The idea that a strong U.S. economy (with a 3.7% unemployment rate and about 3% GDP growth) may not be able to sustain a Fed funds rate of 2.5% is tragic, and may reflect the cost of substantial and growing debt held by the country. If this is the peak of the rate raising cycle, then the purgatory endured by savers for the past decade may continue for many years to come. There may never be a normalization of rates where we can earn 4-5% on cash assets.

If we experience a recession in the next couple years, rates decline close to zero, and then begin to increase again during the next recovery, let's say 3 to 5 years from now, our debt will be even higher and the constraints on how far the rates can increase may be more stringent than they are now. Higher rates may only occur if there is an economic crisis involving a decline in the the value of the dollar and greatly reduced demand for U.S. treasuries. The only way this story has a happy ending for savers (long term) is if we reduce our debt.
Brokered   |     |   Comment #5
Excellent post!
deplorable 1
deplorable 1   |     |   Comment #6
@Fan: This is exactly why I was so angry at Obama for doubling the debt thus making it even harder(if not impossible) to pay it down when rates rise. My fear was that we never get rates back to 5% again. The debt is a major problem going forward and I hope that Trump has the guts to address it. Establishment politicians both Republican and Democrat alike are completely ignoring the debt. In the end it will be us prudent savers who will bear the brunt of these policies while the irresponsible debtors get rewarded.
Mak   |     |   Comment #8
deplorable 1....Obama increased the US debt 74% so not a double... 8.5 trillion in 8 years so about 1 trillion a year and those were some really bad times. Trump has increased the US debt by 1.2 trillion in 2018 alone and that is in good times. Reagan increased the debt by 186%, George W. Bush 101%, Franklin D Roosevelt 1048%, Woodrow Wilson 727%..... debt rises in bad times. Why don't you try putting the blame on Greenspan and Bernanke and stop blaming Obama.
Robb   |     |   Comment #10
Make..I put much of the blame on both parties in Congress who continue to spend like drunken sailors with little regard to the fallout on future generations. While each party whines about the debt while the other party is in power when the pendulum swings both sides have proven to be hypocrites when it comes to the debt issue. Most are only concerned about pacifying their constituents and throw around money like candy to influence votes in an effort to hold onto their jobs. Very few have any sense of fiscal discipline these days.
Mak   |     |   Comment #13
Robb, Lets not forget the fed enables the government to take on more debt with their manipulated low rates. Greenspan was bad enough but he never manipulated the long term rates only until Bernanke came along with his QEs did they go after the long term rate. Now that the fed has kept rates this low for this long people think a 10 year at 3% is too high. I agree that there is enough blame to go around but kind of tired of the blame Obama game.
Robb   |     |   Comment #14
Mak totally agree about the Fed and manipulated rates to 0 resulting in massive speculation including the stock market. Lots of bubbles have been blown up as a result of the easy money policies. The problem is many weak companies that should have been flushed out during the 2007-09 crisis were papered over with debt and become a strain with the recent minor hike in rates. Just this morning Yellen was out with a warning about all the corporate debt out there. She should look in the mirror as she and Bernanke were the ones encouraging both corporations and consumers to take on debt thanks to their 0 rate policies.
dollarsncents   |     |   Comment #15
There's a lot of truth said in several of these comments. Unfortunately, nothing is going to change in our lifetimes. And when "change" does occur, I don't think things are going to end well.
Mak   |     |   Comment #17
Robb isn't it funny how she sang a different tune when she was fed chief just like they all do.
June of 2017....Yellen: Banks ‘very much stronger’; another financial crisis not likely ‘in our lifetime’
Robb   |     |   Comment #28
A-men Mak!
Milty   |     |   Comment #21
Thanks, Mak . . . good post.
Brokered   |     |   Comment #33
It's the trend that matters...
Barack Obama: Added $8.588 trillion
George W. Bush: Added $5.849 trillion
Bill Clinton: Added $1.396 trillion
Mak   |     |   Comment #38
Comment #33.. I replied to this comment but I put it down below accidently.
Inflation Hawk
Inflation Hawk   |     |   Comment #40
For you mathematically impaired folks, you need to look at debt growth as a percentage from what it was at the outset of a president's term in office from what it was when he left.

Reagan increased the debt by 186 percent.
Bush increased the debt by 101 percent.
Obama increased the debt by 74 percent.
Trump is projected to increase the debt the debt by 29% in his first and hopefully last term.
That's after he inherited an economic expansion from Obama.


I'm no fan of Obama.
He tried to throw grandma under the bus by offering the chained CPI to the Republicans.
With Trump, I almost want to jump in front of a bus!
Anonymous   |     |   Comment #46
Mtj   |     |   Comment #18
Great observations.
Brokered   |     |   Comment #4
If the FED raises rates next week and announces (or implies) a pause there will be no incentive for banks to increase CD rates. I was told 3.3% was nuts when I bought them; a few years later I was told it was a great rate. We've got 3% PenFed CD's due this week and I remember being happy to get that rate at the time. I also remember driving past a bank with a 7% 5yr CD offer thinking, "Heck, I make that in the market in a week."
Fan_of_website   |     |   Comment #7
I would suggest that keeping interest rates abnormally low is very similar to enabling a substance use addiction. Zero interest rates encourage borrowers to acquire debt that they will never be able to repay when rates rise again.

When rates do rise, the next recession and economic contraction are inevitably precipitated by borrowers defaulting on their debt, which removes liquidity from the economy and slows growth. In 2008 it was the mortgage crisis. Today, the risk appears to be excessive corporate debt. The majority of the investment grade bonds today are actually BBB rated with higher levels of debt and leverage.

Every time a financial commentator calls for the Fed to slow or halt their interest rate increases is exactly like an addict asking for another hit of their drug. While this action may result in higher stock market prices for a day, or a month, they do not consider or appear to appreciate the long-term damage to our economy and quality of life over time. Younger individuals such as the millennial generation are spending less and experiencing a lower quality of life - such as reduced living space - not being able to afford a larger apartment or house. Why? They have too much debt and inflation is everywhere - except for their salaries.

Fed chief Volcker was right to raise interest rates in the early 1980's to break the addiction cycle. The cost may have been the 1981-82 recession and brought him a great deal of criticism, but the next couple decades of growth justified this decision. If only the current Fed had his courage.
Robb   |     |   Comment #12
Fan...very well stated!
Brokered   |     |   Comment #16
Volcker raised rates to new heights because inflation was completely out of control for a whole host of national and international reasons that do not exist at the present. Paul likes VAT taxes too.
Mak   |     |   Comment #36
Brokered, At the end of George W Bush's term in 1993 the United Sates GDP was 6.8 trillion, at the end of Clinton's term in 2001 the GDP was 10.5 trillion and at the end of Obama's term in 2017 the GDP was 19.5 trillion so imo you can't look at the numbers you have to look at the percentages.
Mak   |     |   Comment #37
I think a better way to look at the debt is by "Debt to GDP" which right now debt is 105% of GDP the only time it was higher was back in the 1940's and World War 2 when debt was 120% of GDP....something definitely needs to be done but no one wants to make the tough choices.
#9 - This comment has been removed for violating our comment policy.
Mak   |     |   Comment #11
TruWest credit union Truwest.org has a 19 month 3.25% CD... available in Maricopa, Pinal, Pima or Yavapai County, AZ.....Travis or Williamson County, TX
$50k max
rockies   |     |   Comment #19
I share many of the opinions voiced here. Stock markets and economies do not move strictly up and to the right. The ebb and flow of economic cycles is natural and good. It cleanses markets of the weak and inefficient. It is one of the miracles of free markets. The short sighted attempts to goose the economy over and over are not sustainable. And, as pointed out earlier, a foundation of extraordinary debt is doomed to crumble under its own weight. Our electorate has allowed itself to be bamboozled by CNN, ABC, CBS, MSNBC and Fox that our problems are left vs right, Pelosi/Schumer vs. Trump, free healthcare and college for all vs. stronger military and border protection. This is nightly entertainment intended to attract viewers and their associated advertising dollars, not thoughtful and rigorous analysis. So, instead of electing politicians who demonstrate discipline, financial restraint, and an ability to solve problems, we have surrendered to the theater of politicians on both sides, not their substance. Think of the idiocy on both sides in the last election. Unfortunately, our politicians are elected today on the promises of where they will spend money. We do not want to hear about cutting government programs, becoming more efficient, prioritizing our spending, balancing the budget. We as a country do not discuss the substantive and hard issues to solve. So, I see two potential outcomes. The electorate has an awakening and begins to hold the politicians and networks accountable. A set of strong, moderate leaders emerge who are able to effectively communicate our national peril and the sacrifices that are going to be required to get our house in order. Or, we enter into an armed conflict with a foreign power under the guise of righting one of the world's wrongs when in fact it is intended to redirect our attention from our own excess. In this case, our politicians can point falsely to external powers as the reason for our inevitable sacrifices. What can we do? Act like adults. Be role models for our children and grandchildren. Speak respectfully about the issues and the common sense solutions that are going to be required. Don't be distracted by the theatrics. Be clear that everyone (and, I mean, everyone) is going to have to sacrifice. And, discard the false left vs. right narrative being conveyed by the current politicians and networks. Demand accountability from our elected representatives and ask our neighbors and friends to do the same. "We the people" are the only ones who can demand solutions to the debt problems of our country.
Milty   |     |   Comment #22
In general I agree except "Be clear that everyone (and, I mean, everyone) is going to have to sacrifice." I think many have already been having to sacrifice for quite awhile and deserve a break, and am not sure that our news media in general has been bamboozling us, but rather many have bamboozled themselves by not educating themselves enough on the issues and therefore making poorer choices.
American only
American only   |     |   Comment #29
I agree with what you are saying, because I have been observing the same thing for a long time. It is really sad that the media - and I do mean ALL of them, right or left - are playing the American people for fools for their own benefit. They want "hits" and "likes" more than they want "truth". The news has become a complete circus, with misleading headlines meant to make you click on the article. They know that all they need to do to make their articles get read is to add the name "Trump" to the headline. We are becoming over-conditioned to all of this so-called "news" ("10 Ways to Part Your Hair", "7 Ways to Wipe Your Butt", etc), 24/7. And because we humans are naturally inquisitive, we actually seek news, and they know it. Psychology is used against the masses all of the time, and that should not be allowed to happen. If you look around you, it is everywhere - courtesy of the marketing department of every brand name out there. The reason why is the obvious one, because everything boils down to "MONEY".
Read the truth before it is gone
Read the truth before it is gone   |     |   Comment #23
You are saving for the illegal aliens. I f you do not believe me, please read this:


The dems let them in to take our assets indirectly by paying for their well being for life. Federal , state and local taxes must rise to pay for the illegals, this is the proof why they come here, The dems are wrong, there is no assimilation, there is no political prosecution in their own country and being a phony refugees is their goal.

So, now after you read the truth, the moderator of this blog will delete it. Read it fast before the truth denials remove it.
???   |     |   Comment #24
I agree with one point
there is no assimilation
but the post well,i hope ,, bye bye
The Terminator
The Terminator   |     |   Comment #26
The guy thinks his quite simple minded elementary school level statement represents some profound truth we should all feel privileged to have had shared with us. Good grief.
Jackie   |     |   Comment #27
#26, the school person knows what is good for the country, listen to him/her, you are part of the problem.
#24, what is wrong with the post?. The person just tolled us what the MSM is hiding from us.
Face the truth or perish
Face the truth or perish   |     |   Comment #31
The terminator and the ??? are democrats, they can not stand the truth nor reality nor honest persons who spread something that the democrats are afraid of and that is, any real news that attacks the democrats.
The democrats want to be lied to, pondered and appeased and never to know the real truth. Good luck with that mentality, it will divide and destroy many lives.
111   |     |   Comment #35
From comment #23 above -

"Give us $50,000 each to go home: Caravan migrants march to the US consulate in Tijuana, Mexico, demanding US government let them in or pay them off. ..."

OK - do we now have a new financial catchphrase sound-byte, to rival that from 2008: "Too Numerous to Fail - at Blackmail?"

I know that makes this post fodder for easy deletion, but I just couldn't help myself.
Gerry   |     |   Comment #39
#35, the us government, including the states and local cities, listen to this, they cost US taxpayers over $250 BILLIONS per year to care for the illegals and the tax avoiders and the lazy aliens (legal or illegal).
This has been going on for some times now and if Trump does not get the money for the wall, the invaders will make south Africa out of USA, do not take my word for it, research it for yourself and tell us who is right the democrats or GOP!
rockies   |     |   Comment #43
#23 and #35, Neither the Dems nor the GOP are right. Dems failed to pass immigration legislation when they had the chance during Obama and GOP failed to act when they had all three branches of government under Trump. This immigration topic is a sham. Neither side wants to seriously address, so they will keep batting the ball to the other side of the net and call each other names on the evening news. Just plain dumb. Hold our Congress responsible for doing their jobs and develop a reasonable and rational border policy and stop calling each other names. This is not rocket science.
Proof for comment #43
Proof for comment #43   |     |   Comment #44
#43, Yes, it is a rocket science because the USA media and most of the democrats are puppets to the elites and they are controlled by the globalists. If you do not believe that, here is the 100% proof:

Make America Hispanic Again
Make America Hispanic Again   |     |   Comment #41
With the unemployment rate at it's lowest point since 1969, we should let anyone into the country that want's to work.
That what a true market based economy would do!
An added benefit would be all that cash pouring into Social Security.
¿Hablas español?
Reply to comment #41
Reply to comment #41   |     |   Comment #45
#41, how misguided you are, the illegals and the refugees come here for the benefits, not to work or contribute to the society. They never even try to assimilate or become Americans, they never pay taxes or contribute in any way. Do not let the media and the democrats continue to brainwash you, there are 5 millions such persons on welfare just in California and over 35 millions across the nation and they never contribute a penny to IRS or the local government.

The democrats gave $150 billions free money to Iran, but are fighting Trump for lousy $5 billions for the wall, that should open your eyes and make you outraged. The illegals and not working, 75% of the aliens who collect benefits are costing this nation $250 billions a year, stop here and do the right thing, clear your mind from the fake news media that have been poring misinformation into your mind for years and years.
deplorable 1
deplorable 1   |     |   Comment #30
One good thing I have noticed is that the FED did raise interest rates as inflation started to pick up even with our mountain of debt. They also did this while unwinding QE at the same time. Now if inflation picks up and the FED fails to respond that's when its time to worry.
SuperSauce   |     |   Comment #32
Ken, anything to add post inflation number release?
anonymous   |     |   Comment #34
Perhaps instead of rigidly raising the Fed funds rate, the Fed should consider accelerating the unwinding of QE.

Raising the Fed funds rate looks like will likely lead to a yield curve inversion, which in and of itself is not problematic, but appears to make all market players very nervous and might spark a self-made recession.

QE was quite effective in lowering longer term yields (they actually used to be stuck stubbornly high, like they are now stuck stubbornly low), so the reverse of QE should help to raise longer term yields and avoid the "optics" of an inverted yield curve.

I hope the Fed is thinking along those lines in their decision making ...
Make America QE Free Again
Make America QE Free Again   |     |   Comment #42
Oh please, that would make entirely to much sense!
Federal Reserve, the Economy and Future CD Rates

This is my first 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 CD 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,...

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