Federal Reserve, the Economy and CD Rate Forecast - Feb 18, 2020


Little has changed in the economy to impact interest rate expectations in the last week. Worries about the coronavirus outbreak’s impact on the economy grew today due to Apple’s warning that it doesn’t expect to meet its quarterly revenue forecasts due to the outbreak’s effect on China. However, there was good economic news this morning in manufacturing. The New York Federal Reserve’s Empire State business conditions index increased much more than what economists were expecting. This is one of many signs that manufacturing has rebounded as trade uncertainty has eased after the signing of the Phase One of the U.S./China trade deal.

In the last week there have been news stories about how the stock and bond markets have been diverging this year. Last week, the U.S. stock market was at near record levels. At the same time, bond yields have fallen and yield curves have inverted. Even before the coronavirus news, the downturn of the global economy and trade concerns had been pressuring down bond yields. However, low unemployment and a strong U.S. consumer have kept the odds of a recession low. Low inflation has allowed the Fed to lower rates last year, and investors appear confident that the Fed will lower rates more this year if the U.S. economy takes a hit from global issues. Of course, the low rates have definitely contributed to the record stock market highs.

Investors' worries are having an impact on the Fed Funds futures.The odds increased again that the Fed will cut rates this year. The Fed Funds futures are pricing in odds of 85.8% that the federal funds rate will be down by at least 25 bps by December. This is up from 80.0% last week. The odds of a rate cut remain fairly low for the next few months. For the March meeting, the odds of a rate cut is only 14.4%. These odds are based on the CME Group’s FedWatch Tool

Most Treasury yields were up a little from last week. The 2-year note had the largest yield gain, rising 5 bps. This caused the 10-2 spread to narrow slightly. The spread is now 17 bps, down from 19 bps last week. The 10-2 spread is the difference between the yields of the 10-year and 2-year Treasury notes. A negative 10-2 spread has a history of preceding recessions. Even though the 10-2 spread isn’t negative, other spreads are. For example, the 1- and 2-month T-Bills still have yields that are currently above the 10-year yield. However, in the last week, the 3- and 6-month yields are no longer higher than the 10-year yield. That may change by the end of today if the economic concerns pushes down 10-year yield.

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

Treasury Yields (Close of 2/14/20):

  • 1-month: 1.60% up from 1.58% last week (2.45% a year ago)
  • 6-month: 1.56% down from 1.58% last week (2.51% a year ago)
  • 1-year: 1.49% up from 1.45% last week (2.53% a year ago)
  • 2--year: 1.42% up from 1.37% last week (2.50% a year ago)
  • 5--year: 1.42% up from 1.38% last week (2.48% a year ago)
  • 10-year: 1.59% up from 1.56% last week (2.66% a year ago)
  • 30-year: 2.04% up from 2.03% last week (3.01% a year ago)

Fed funds futures' probabilities of future rate changes by:

  • March 2020 - down by at least 25 bps: 14.4% up from 10.0% last week
  • March 2020 - up by at least 25 bps: 0.0% same as last week
  • June 2020 - down by at least 25 bps: 52.0% up from 42.9%% last week
  • June 2020 - up by at least 25 bps: 0.0% same as last week
  • Dec 2020 - down by at least 25 bps: 85.8% up from 80.0% last week
  • Dec 2020 - up by at least 25 bps: 0.0% same as last week

CD Interest Rate Forecasts

CD rate cuts continue to slow down as February entered its third week. As the Fed’s pause continues without signs of it nearing an end anytime soon, CD rate cuts should become less common. However, if economic concerns grow and Treasury yields slide, we may see banks and credit unions cutting their rates even if the federal funds rate holds steady.

A few institutions, especially credit unions, have been slow in making changes to their CD rates. Those which are rate leaders and have yet to cut rates from last year will experience pressure to reduce rates as savers take advantage of these slow movers.

The following are the noteworthy CD rate changes from last week. All were rate cuts. One thing to note is that there were no CD rate cuts from the major online banks.

All percentages listed below are APYs. The symbol “v” represents a rate cut, and the symbol “^” represents a rate hike.

  • Garden Savings FCU (5yr v 15 bps to 2.07%, 1yr v 26 bps to 1.76%)
  • INOVA FCU (14m v 15 bps to 2.25%)
  • Amerant (1yr v 15 bps to 2.10%)
  • TIAA Bank (5yr YP v 5 bps to 2.00%, 1yr YP v 5 bps to 1.85%)
  • USAA Bank (5yr S Jumbo v 7 bps to 1.86%, 1yr S Jumbo v 4 bps to 1.81%)
  • Limelight Bank (3yr v 5 bps to 2.10%, 1yr v 5 bps to 2.05%)

A few online savings and money market accounts had rate cuts in the last week, but like the CDs, none of the major online banks had cuts. Most of the rate cuts occurred on new or promotional accounts or at the small online banks that have been aggressive with their rates. I still think we are nearing a point in which the online banks have caught up with the Fed’s October 30th rate cut. However, we may still have another month or two of small cuts on online savings accounts. Below are examples of important savings and money market rate changes in the last week.

  • Salem Five Direct eOne Savings (-6 bps to 1.85%)
  • Virtual Bank eMoney Market Special (-7 bps to 1.80%)
  • Quontic Bank High Yield Savings (-5 bps to 1.90%)
  • BrioDirect High-Yield Savings (-5 bps to 2.00%)
  • SFGI Direct Savings (-5 bps to 1.86%)
  • BankPurely / iGObanking Money Market (-5 bps to 1.85%)

I’ll have more discussion of the savings and money market rate changes later today in my liquid account summary.

CD rates if the economy remains strong

It still appears likely that the Fed will be holding rates steady for an extended pause period. The Fed may eventually return to a slow series of rate hikes, but the odds of that happening in 2020 have essentially fallen to zero. The upcoming election only reinforces this. If the Fed returns to a slow series of rate hikes, it probably won’t come until 2021. Without the near-term prospects of rising rates, it’s doubtful that we’ll see any widespread CD rate increases in 2020.

If the economy grows above expectations in 2020, that could put upward pressure on CD rates even if the Fed holds rates steady. We saw the opposite of that early last year. During that time, the Fed held rates steady while concerns grew about the economy. Treasury yields were the first to fall. Brokered CD rates were next to fall. By late Spring 2019, direct CD rates started to fall. If we see consistent increases in Treasury yields and brokered CD rates in 2020, that will likely be early signs that direct CD rates will rise, regardless of the federal funds rate changes. We are far from that happening as Treasury yields have been falling since the start of the year.

CD rates if the economy weakens

In other scenarios, the economy performs below expectations. That could be due to the coronavirus or other shocks to the global economy. Treasury yields would be the first to respond to disappointing economic news. Treasury yields have fallen quite a bit in January, but it’s too soon to know if this is only due to transitory uncertainty in the markets or if it portends a significant economic decline. If economic weakness does materialize, CD rates would remain down for quite some time.

One of these economic weakness scenarios is an economy that has more of a slowdown than the Fed currently anticipates, but not enough to become a recession. For this scenario, the Fed cuts rates one to three more times, and the extended pause doesn’t begin until sometime in 2021. The pause would then likely extend through 2021. We would be lucky to see widespread CD rate hikes in 2022.

The other scenario is the recession scenario. This appears unlikely for now, but it can’t be ruled out. In this scenario, the U.S. economy falls into a recession in the next year, and we return to zero rates. In this scenario, it could take several years before we return to Fed rate hikes.

With rates as low as they are, it wouldn’t take much of a slowdown for the Fed to return to zero rates. For the period when the Fed held rates near zero (Dec 2008 to Dec 2015), CD rates didn’t fall to zero, but it became difficult to find long-term CDs with rates above 2%.

Occasional 3% CD

As I described in previous Fed summaries, there were times during the zero rate years when a credit union offered 3%+ CDs. PenFed’s 2013 year-end CDs were examples of 3% CDs. Even though 3% CDs are now rare, 3% CD specials will likely pop up every now and then in this current interest rate environment. The few that have popped up, haven’t been lasting long. The one exception is the 7-year CD at Andrews Federal Credit Union, which has been 3.05% APY since last August.

CD Term Decisions

If it looks like we are headed toward the first scenario, short-term and mid-term CDs would make the most sense. Longer-term CDs make more sense if we’re heading toward more of a slowdown in the economy or a longer pause period. Each new week seems to be strengthening the case that we are headed toward this second scenario.

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.

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 continue to fall. However, a slowdown of rate cuts is evident.

  |     |   Comment #1
Too much money floating around , no scarcity value at all = no one needs to pay for it
  |     |   Comment #2
Even the 30 year treasury fell below 2% in 2020 (record historic lows below 2% first set in August), not a good sign..
  |     |   Comment #3
Too much money printing and manipulation of rates...makes one wonder how much purchasing power has been taken by the Fed from savers over the past decade.
  |     |   Comment #4
I don't know. I'm a saver. And I'm driving a better car, living in a better house, eating at better restaurants, going on more vacations, and have a significantly higher net worth and retirement fund than I did 5 years ago. Whatever the Fed is doing, I'm finding it hard to figure out how that's a bad result.
  |     |   Comment #5
I'm finding it hard to figure out how the Fed's near-zero interest rate policy could have possibly contributed to your higher standard(s) of living. If you're relying primarily on retirement funds, then you must have been invested in somewhat risky assets (ie.> stock market) in order to create such stellar returns.

OTOH, if you're still working, well, then all of that good stuff could have resulted from your OWN income...not interest from savings.
  |     |   Comment #6
That's easy. The low interest rates help businesses expand and make more profits which in turn contributes to better jobs and higher wages, better return for stock market investors and benefits everyone, perhaps the only exception being those savers who choose not to diversify their portfolio and limit their savings to low yielding interest bearing investments.

Of course I own some stocks. It's very risky not to own them for the very reason you are alluding to. Some of the money that I saved goes into the stock market. Any prudent saver should do the same. If you don't, it's not the Fed's fault.
  |     |   Comment #7
Of course, everyone should diversify to some degree. But let's be real,; the likelihood of someone interested in 'saving' on a blog titled 'Deposit Accounts' isn't necessarily going to be so interested in the facilitation of all of those indirect benefits you mentioned.

Higher wages and better stock market returns, for those whose PRIMARY income comes from those sources, will surely benefit. But not only do rates need not be this low for all that to happen, those indirect 'benefits' are not all things to all people. Extra vacations, new cars, etc. is a bit off point because those really can't be a DIRECT result of the lower rates.
  |     |   Comment #8
The results are a product of sound economic policy and the Fed's cooperation with that policy so as not to work against it by raising rates. Nothing in the Fed's charter creates a goal of maximizing interest rates. Its main criteria for setting rate policy is to support the goals of maximizing employment and maintaining price stability, both of which are currently at historically record success levels. In fact its third mandate is to keep interest rates as low as possible consistent with the first two goals in order to stimulate the economy. There is no reason to raise rates when inflation is so low.

The answer to low bank rates is not to bash the Fed, which is doing an excellent job supporting this record breaking economy and put pressure on them to make the economy worse by increasing rates unnecessarily. The answer is for savers to choose the right investments to respond to the savings environment. The instruments for success are there. But you have to use them for them to work.
  |     |   Comment #9
CPI continues above fed rate so savers are losing purchasing power unless savers locked in CDs at the top like many of us here.  Even the Fed's favored PCE is trending higher.  Stock market bubbles risks principal which people with low risk tolerance try to avoid.  Record national debt & asset bubbles aside, "The Federal Reserve’s balance sheet is on track to rise to a record high by mid-2020, creating a fertile ground for risk assets..  Balance-sheet expansion is like printing money — but for financial institutions only. It does affect the monetary base (excess reserves plus currency in circulation), which is the narrowest definition of money supply (M0). It basically causes asset-price inflation without causing uncontrolled broad money supply growth, which is why has it has not (yet) resulted in hyperinflation" ref: You better believe the Fed is doing quantitative easing — and here are the beneficiaries however keep in mind:  "From 2008 to 2017, the combined asset holdings of central banks in the major advanced economies (the United States, the eurozone, and Japan) expanded by $8.3 trillion, according to the Bank for International Settlements. With nominal GDP in these same economies increasing by just $2.1 trillion over the same period, the remaining $6.2 trillion of excess liquidity has distorted asset prices around the world.  Therein lies the crux of the problem. Real economies have been artificially propped up by these distorted asset prices, and glacial normalization will only prolong this dependency. Yet when central banks’ balance sheets finally start to shrink, asset-dependent economies will once again be in peril. And the risks are likely to be far more serious today than a decade ago, owing not only to the overhang of swollen central bank balance sheets, but also to the overvaluation of assets.  That is particularly true in the United States" ref: Complacency Will Be Tested.. hence the >$15 trillion of negative-yielding bonds around the world..
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