Federal Reserve, the Economy and CD Rate Forecast - Sep 17, 2019


The Fed’s two-day meeting started today. The meeting announcement is scheduled for 2:00 PM EDT Wednesday. Along with the announcement, the Fed will be releasing its quarterly Summary of Economic Projections (SEP), which includes the “dot plot” that shows FOMC participants’ expectations of the future federal funds target rate. Following these releases, a press briefing by Fed Chair Jerome Powell will take place. The odds still show a 25 bp rate cut is the most likely outcome, but the odds of the Fed holding rates steady have been rising.

If the Fed does go forward with another rate cut, it’s likely that there will be no clear signal about future rate cuts. The main reason is the economy. There are no signs that a significant slowdown is coming. That would be the only valid reason to keep cutting rates. As this CNBC article described, “Stronger economic data recently, featuring increases in consumer and business confidence as well as retail sales, has helped fuel some of the less-dovish sentiment.” That may keep the two Fed officials who voted against cutting rates in July to vote again to hold rates steady.

In June when the last SEP was published, the dot plot showed that eight participants were anticipating one or more rate cuts in 2019. Eight other participants were anticipating no change in rates, and one was anticipating one rate hike. It’ll be interesting to see in the new SEP how the dot plot changes. It seems possible that most participants will not be anticipating additional rate cuts.

The rising odds that the Fed will either hold steady on rates or will soon end its rate cutting can be seen in the Fed Funds futures markets (via the CME FedWatch Tool). They are showing odds of 63.5% that the Fed will cut rates. That’s a big change from last week when the odds were 91.2% of a rate cut. The odds of additional rate cuts later this year have also fallen. The odds that the federal funds rate will be at least 50 bps lower by December are now under 50-50 (49.0%). That’s down from 74.5% last week.

The Treasury market has also lessened the case for a Fed rate cut. Yields have increased substantially from last week, with the largest yield gains on the long-dated notes and bonds. Thus, there is less need to raise the federal funds rate to reduce the yield curve inversion. The 10-year note had the largest yield gain, rising 21 bps from last week. The 2-year yield gained 16 bps. This resulted in a widening of the 10-2 spread (the difference between the yields of the 10-year and 2-year Treasury notes.) The spread is now 10 bps, up from 5 bps last week and up from 0 bps two weeks ago. A negative 10-2 spread has a history of preceding recessions.

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

Treasury Yields (Close of 9/16/19):

  • 1-month: 2.08% up from 2.04% last week (2.02% a year ago)
  • 6-month: 1.93% up from 1.87% last week (2.33% a year ago)
  • 1-year: 1.86% up from 1.74% last week (2.56% a year ago)
  • 2--year: 1.74% up from 1.58% last week (2.78% a year ago)
  • 5--year: 1.69% up from 1.49% last week (2.90% a year ago)
  • 10-year: 1.84% up from 1.63% last week (2.99% a year ago)
  • 30-year: 2.31% up from 2.11% last week (3.13% a year ago)

Fed funds futures' probabilities of future rate CUTS by:

  • Sep 2019 - down by at least 25 bps: 63.5% down from 91.2% last week
  • Sep 2019 - down by at least 50 bps: 0.0% same as last week
  • Oct 2019 - down by at least 25 bps: 77.5% down from 96.7% last week
  • Oct 2019 - down by at least 50 bps: 24.4% down from 53.3% last week
  • Dec 2019 - down by at least 50 bps: 49.0% down from 74.5% last week
  • Dec 2019 - down by at least 75 bps: 11.4% down from 26.4% last week
  • March 2020 - down by at least 100 bps: 9.7% down from 21.3% last week

CD Interest Rate Forecasts

Banks and credit unions continue to cut their CD rates. If the Fed signals that it could be done with additional rate cuts after Wednesday, we may see a slowdown of CD rate cuts. The rising Treasury yields should also be helpful. Below are a few recent examples of CD rate cuts from last week. These focus on the popular institutions and former rate leaders. All percentages are APYs.

  • Capital One (18mo fell 65 bps to 1.90%, 5yr fell 70 bps to 1.60%)
  • American Express (18mo fell 15 bps to 1.90%, 5yr fell 20 bps to 2.15%)
  • Alliant Credit Union (24mo fell 5 bps to 2.35%, 5yr fell 10 bps to 2.45%)
  • Live Oak Bank (18mo fell 5 bps to 2.45%, 4yr fell 5 bps to 2.45%)
  • WebBank (1yr fell 10 bps to 2.15%, 5yr fell 25 bps to 2.30%)
  • First Internet Bank (1yr fell 10 bps to 2.22%, 5yr fell 8 bps to 2.41%)
  • AgFed Credit Union (5yr fell 20 bps to 2.65%)
  • Comenity Direct (1yr fell 10 bps to 2.30%, 5yr fell 10 bps to 2.50%)
  • Rising Bank (18mo Rising CD fell 15 bps to 2.35%, 3yr Rising CD fell 15 bps to 2.35%)
  • Northpointe Bank (1yr fell 25 bps to 1.75%, 5yr fell 45 bps to 2.25%)
  • Prime Alliance Bank (1yr fell 40 bps to 1.90%, 5yr fell 25 bps to 2.50%)

For the last several weeks I provided a scenario which showed that it would take at least a couple of years before CD rates would return to early-2019 levels, assuming the U.S. does not fall into a recession. Of course, if the economy falls into a recession in the next year, we would very likely return to zero rates. The more optimistic scenario assumes only two or three more rate cuts with a short-lived economic slowdown. The Fed would then slowly go from rate cutting, to a rate pause, and then back to rate hiking.

Based on recent news, it’s possible that an even more optimistic scenario plays out. In that case, the Fed’s last rate cut occurs tomorrow. After the market throws a tantrum, a turn-around occurs with the economy and the market returning to solid growth. Even in that case, we should expect the Fed to pause for several months until their confidence in the economy is sustained. Then they would start hiking rates again, probably no faster than their pace in 2018. In this scenario, we could see a return to early-2019 CD rates within a year. My guess is that it’s going to take more than a year to return to early-2019 CD rates.

Since it’s unlikely that we’ll see widespread rate hikes in the next year (even if the economic slowdown is short), I think it makes sense to allocate more of your savings into mid-term and long-term CDs rather than savings accounts and short-term CDs. If you’re optimistic about the economy, choose mid-term CDs. If you’re less optimistic, choose long-term CDs.

There continues to be a few institutions that are offering 3% CDs. In addition to Navy Federal’s 5-year CD (3.25% APY) and 18-month CD (3.00% APY), there are a handful of credit unions with 3% 5-year CDs. There are no longer any banks that I’m aware of that are offering CDs with yields of at least 3%. The banks that had been offering 3% or higher, did not maintain these rates for long (Note, to see Navy Federal’s CDs in the CD rate table, click on “Advanced options” in the filter box and click on “Select All”. This will include credit unions in the table that primarily limit membership to select employer groups.)

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 are now on the decline.

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.

Jennifer   |     |   Comment #1
This is so exciting. I simply adore this sort of drama. I can't wait to find out what the announcement is on Wednesday afternoon!
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Jean   |     |   Comment #33
I'm just very thankful and fortunate to have money put away in savings. Where it's at, and what the interest rate is, doesn't matter that much. I count my blessings every day! I don't care what the Fed does.

So many people are struggling. Please donate to your favorite charity.
deplorable 1
deplorable 1   |     |   Comment #43
Yeah and a lot more people were struggling under Obama with low pay and 0% interest rates Jean. If they are struggling so bad then let them go get a job and support themselves instead of looking for handouts from the rest of us!
DCGuy   |     |   Comment #49
That is the crux of the problem. People are getting jobs that don't keep up with the cost of living. Even high tech workers in silicon valley cannot afford to live in the SF area. And you have the homeless that have nowhere to go in major cities. Maybe we should just funnel all of the struggling and homeless people into prison camps and let them work there?
deplorable 1
deplorable 1   |     |   Comment #53
Wages are up from the Obama years DC. Maybe the taxes in California are too high due to all the Socialist handout programs and other liberal policies. You think handing homeless people a check funded by taxpayers will solve anything? These guys are mentally ill and/or drug addicted all they will do is go out and buy more drugs with that money.
I used to give poor folks money if they were begging because I felt sorry for them until a co-worker told me that I was just funding their addiction. He told me to offer to buy them some food instead of giving them money so I did. Sure enough they didn't want the food only the cash. You can't buy booze and drugs with food.
111   |     |   Comment #62
Several years ago, at one of the intersections in my area that was most popular for begging, a guy was holding a sign that said "Why lie? I need a beer!" I gave him $5, just for originality.

But, nothing since then. It's no longer original.
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deplorable 1
deplorable 1   |     |   Comment #54
You may think I'm cold but where have all these handout programs gotten us? Where do you think the debt comes from? The one thing you can be sure of is if you are handing out free cash there will always be a never ending line of people with their hands out.
UFO   |     |   Comment #70
Question Where do you think the debt comes from? In the year 2000, the government had a surplus. But instead of using it to pay down our debt, the money was spent on trillions of dollars in new tax cuts, while two wars and an expensive prescription drug plan were simply added to our nation's credit card.
As a result the deficit was on track to top $1 trillion in 2008. The recession meant there was less money coming in and it required us to spend even more...on tax cuts for the middle class to spur the economy, on unemployment insurance, on aid to states to prevent more teachers, firefighters and police from being laid off. Those emergency steps also added to the deficit. Today, between the 2018 tax cuts and the increase in spending for 2020 and 2021 it will push the accumulated deficits to the largest ever over a four year timeframe
deplorable 1
deplorable 1   |     |   Comment #57
I don't have a problem with charity but I do take issue with our government becoming a charity and forcing us to donate to that charity by force through taxation. It's one thing to give but quite another to take and forcibly redistribute through socialist programs.
Anonymous   |     |   Comment #58
Do you know why rates were O%? Because laissez-faire economics let the banks bet on bogus derivatives, which led to a crash which almost destroyed the entire economy. So there was a drastic drop in rates, intended to give the banks virtually free money. The middle class ended up paying for the bailout of the banks. The handouts you hate are going to the billionaires now.
PLEA BARGAIN   |     |   Comment #2
I got burned a few weeks ago by the Fed........They lowered the rate .25 which was fine......But then about 20 minutes later that worm Fed Chairman started talking. That was his mistake. Sent the markets into a tailspin -me along with it. Thankfully the markets have come all the way back and then some. But still makes me so mad. I'm waiting until at least Thursday to do anything this time!......I know, I know......You can't time the markets......But still.....once bitten twice shy. I'm staying on the sidelines until Thursday.
deplorable 1
deplorable 1   |     |   Comment #16
I wouldn't worry about timing the market as much as timing the price of the particular stock you are interested in. I'm more of a long term income investor though so these short term price swings can actually present some buying opportunities.
PLEA BARGAIN   |     |   Comment #36
Yes I agree Dep1.......That's why I refuse to buy any stock or etf that does not pay a dividend. I can deal with price swings but I want to know that I'm at least getting something. Like having a base salary. Now I know of course dividends can be cut or cancelled......but I stay diversified and besides the the companies I invest in are extremely likely to continue paying dividends
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deplorable 1
deplorable 1   |     |   Comment #3
I think it's too late for them to pull back on this .25% rate cut even though they should as they don't want to shock the market. They really need to stop this "insurance" rate cut business. They are supposed to be data dependent but then they started cutting rates with no data to support rate cuts. In fact if you were just looking at the numbers there was more to support a rate hike than a cut or at the very least a pause. If the FED is truly independent as they claim to be they would ignore the president's calls for 0% or negative rates in the face of a healthy economy ironically the one he himself created.
PLEA BARGAIN   |     |   Comment #6
Deplorable 1 you always get it right! I love Trump but on this I disagree. He better be careful not to alienate seniors with this bs about 0% and negative rates!! I read something yesterday that there is about a one third chance they will leave rates alone given some inflationary pressure. Odds are a .25 cut but you never know.......and I'm not buying until well after the storm ........I'm not getting burned again.
Cracker   |     |   Comment #56
I agree. I like most of the things the President is doing, but he's 100% wrong on interest rates. They need to rise, not fall. We need to be encouraging savings, not debt.
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PLEA BARGAIN   |     |   Comment #4
.25 is already figured in the market......so I doubt it will do much with just a .25 cut-maybe up a bit. I think .50 is extremely unlikely. The market will plummet if they decide to leave rates unchanged-which is actually a very real possibility.........Also the idiot's little speech right after will make a HUGE difference. We will see. As I said above I'm flying over the storm this time-not buying/selling a thing until Thursday.
Human   |     |   Comment #5
Ken, Bank of Little Rock, in Arkansas is still offering 5 year CD with the rate of 3.04% for minimum balance of $500.00. The CSR informed me this is available for any one in the state of Arkansas.
Cch   |     |   Comment #7
.25 rate cut and 2/3 more cuts thru year end and beginning 2020...treasuries will fall again to new lows and stay there for an extended period of time. Then rates will continue to fall. Its already preplanned by the fed...they always overshoot.
PLEA BARGAIN   |     |   Comment #8
They are terrified of the 22 trillion debt. They have to keep rates low and then hope for inflation so they can refinance.
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deplorable 1
deplorable 1   |     |   Comment #25
I think this may end up being the last cut for a while. The economic data just doesn't support any more cuts. But who knows you can't predict FED rates based on economic data anymore. Nothing they do would surprise me after this. They seem to be using any excuse to cut rates.
buckeye61   |     |   Comment #10
FED rate cuts are not necessary in my opinion, but whatever their rational is("Insurance")for cutting they need to be decisive in their forward guidance. How much "Insurance" does the economy need to offset a sluggish global economy and low international bond rates? If its 50 basis points they should do it now then tell the market that they'll need to wait an extended period of time to allow these cuts to work before determining if more cuts could be needed down the road. If the FED is truly divided about doing even 25 basis points they should announce after making that cut(Or leaving rates unchanged)  that they are on "Hold" till further notice. They need to take control of the narrative.
QED   |     |   Comment #11
Dear Lord I hope they somehow find a way to hold off on the interest rate decrease. Very latest estimates are putting probability of a cut at less than 50-50. We savers badly need a break. Fingers are crossed.
bot   |     |   Comment #12

New York Fed steps into market to move interest rates.
Anonymoose   |     |   Comment #13
I have my own theory about Powell's rate cuts. It's well-known that Powell is no friend of President Trump. I think it's a stretch to assume that there's collusion between the two to lower rates.

Yes you have to ask why he would be lowering rates when there's minimal inflation and the economy is the strongest it's been in more than a decade.

Lowering rates feeds into the Democrat's (phony) narrative that there is an impending recession. Like those who suspect collusion between Powell and President Trump to lower rates, I too don't trust Powell. But my reasoning is different. If there is collusion, I think it's with the Democrats.
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Diogenes   |     |   Comment #24
Oh, you got that right . . . everyone knows Trump and his Republican cronies only appoint those sympathetic to Democrats, and when they aren't he fires them immediately and publicly admits his mistake. Thank goodness y'all can see the light.
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Reality   |     |   Comment #28
Learn about the recent overnight repo rate scramble and you'll stop trying to sound like a monetary expert on FED policies.
Anonymoose   |     |   Comment #29
You can blame the bloated oversized government and ridiculously high taxes needed to pay for it for it for that little episode. Companies had to borrow a fortune to pay the quarterly taxes that were due this week and it overloaded the system causing it borrowing rate spike. Just one more reason we need to cut government and taxes down to size instead of piling on even more bloated bureaucracy.
Anonymoose   |     |   Comment #30
Meant to say that the banks had to borrow because of companies withdrawing so much money to pay their quarterly taxes.
Reality   |     |   Comment #31
No problem.
The FED does serve a valuable purpose as we shall see this afternoon.
Anonymoose   |     |   Comment #32
I don't disagree. You can't have a large economy without a central bank.

The spike in overnight borrowing rates is no harbinger of catastrophe though. The banking system is probably stronger than it's ever been in history. Banks are doing extremely well.
Anonymous   |     |   Comment #35
Fed will cut rates by .25. Stock market loves rate cuts, since people are virtually forced to take money out of `1% savings accounts and take a whirl on the roulette wheel. Uninformed people who want to see the stock market as proxy for the economy, will be excited--for a month or two. In my view, an economy which does not encourage and even slightly reward savers, will ultimately collapse under the weight of state and consumer debt. .1% at the top, everyone else at the bottom, with no savings and no purchasing power. Somewhat like the feudal system, which aristocrats have waited 400 years to finally restore.
Anonymoose   |     |   Comment #37
"Fed will cut rates by .25. Stock market loves rate cuts, since people are virtually forced to take money out of `1% savings accounts and take a whirl on the roulette wheel."

Lower rates means companies can borrow more money, invest more in capital infrastructure hire more people and pay higher wages. That's all good.

Corporate debt is not the problem, it's government debt that's the problem. Government spending, borrowing and taxes are sucking the life out of our children's future.
c_q   |     |   Comment #38
Most corporations do not generally increase wages or hire more people just because they can borrow more money cheaper. All they do is acquire assets that they think can generate a return greater than the interest rate charged. Wages and employment may go up as a secondary factor of having more things to manage, but only if they feel it is necessary to maintain the business.
Anonymoose   |     |   Comment #48
"Most corporations do not generally increase wages or hire more people just because they can borrow more money cheaper."

They don't hire more people BECAUSE borrowing costs are lower. They hire more people because there is business to be had by expansion and lower borrowing costs ALLOW THEM to obtain the funding that they otherwise could not afford at higher rates.
Fed Up
Fed Up   |     |   Comment #40
It's the darn politicians and how they allocate their time is the problem. They don't work for the people the work for themselves.
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DCGuy   |     |   Comment #50
I don't think it goes back that far. At the beginning of the 20th century, the "gilded age" saw rich tycoons control a large part of the economy. It took an income tax law and a great depression to "rearrange" some of the wealth. Now we are going back to the early 20th century. Happy days are here again. ;)
c_q   |     |   Comment #39
Reading about the fed repo actions (first in 10 years) and the fact that the fed funds target blew past their range today (2.30 is not within 2.0 to 2.25), I would assume that lowering the target will make it even harder for them to maintain it. They may have to do their 25 cut because it's so expected by now, but a 50 cut seems completely out of the question. And I would suspect further cuts may not happen if the fed continues to have difficulty (or is too costly) maintaining the target.
gone fishin
gone fishin   |     |   Comment #42
So they cut 25 bp, that's it? Dow down 165 at present. 25 is not even worth the time! Cut it a full 1% or get out of town! Then POTUS will be happy and the rest of is can get on with our lives. LOL.
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fishin is good
fishin is good   |     |   Comment #44
And Trump's response?

"Jay Powell and the Federal Reserve Fail Again. No 'guts,' no sense, no vision! A terrible communicator!" Trump tweeted within minutes of the Fed's move.
deplorable 1
deplorable 1   |     |   Comment #46
The craziness continues with another rate cut even though there is no justification for it. They are totally ignoring rising inflation. Then we have Trump complaining that it's not enough. I hope he realizes that many retirees need interest income to survive in retirement and that they are part of his voting base. It's not fair to try and pay off the debt on the backs of savers when we already bailed out the banks after the housing and financial crisis. Cut some spending instead.
bbb   |     |   Comment #47
Trump is disconnected from everyday folks like that. So, no I don't think he realizes (or cares) that many retirees need interest income to survive in retirement. He's the same guy who thinks you need a photo ID to buy groceries. I doubt he's ever even stepped foot into a grocery store.
Enjoy   |     |   Comment #52
T rump is in full connection with his base. They want a stop to illegals pouring in through our southern borders and he is doing that despite dems roadblocks. They want lower taxes and jobs and he is doing that also. THey wanted reform healthcare and he's starting to do that by eliminating the mandate. The dems are so furious that T rump is succeeding they spend all their time and our money by dreaming up ways ways to impeach him because they can't do it the legal way.
Anonymous   |     |   Comment #59
Taxes on the middle class will go up this year, to pay for the massive tax cuts for the billionaires. "Reform healthcare" for Trump means take away healthcare for tens of millions, with nothing to substitute for it but junk plans. You may not care, but the end result will be a return to the Gilded Age, where ten to twenty multimillionaires lived in gigantic mansions, while virtually everyone else lived in tenement slums and worked 80 hours a week for below subsistence wages. After about 50 years of recessions and a Depression, the rise of the power of workers and unions, people voted for FDR and the New Deal. This is what Republicans have been trying to dismantle for the last 80 years, and Trump, who truly hates anyone who is not rich, or duped into voting for him, is trying to finish the job.
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deplorable 1
deplorable 1   |     |   Comment #63
The middle class got the largest tax cut on a percentage basis. Just look at the lowered tax brackets. Jobs are plentiful and wages are up. The rich have seen increased taxes due to some of their tax breaks being taken away. Trump has been lifting people off of poverty. If you really want to see taxes go up for the middle class just elect a Democrat. When they say they will only tax the rich that is a total lie because the cost of their crazy plans will require raising everyone's taxes. There are not enough rich people to tax to pay for medicare for all, free college and the economy destroying new green deal.
GimmeABreak   |     |   Comment #71
Why didn't Trump build the wall when Republicans controlled Congress? After he was elected Trump enjoyed two years of the Republicans controlling the House and Senate-why didn't the Republicans provide the funds while they ruled Capital Hill? The wall has never been a top priority for most Republicans and this reflects the limited enthusiasm among conservative policy makers and voters. Although concerned about immigration, the American public remains unconvinced that the wall was going to solve the problem. Trump is blaming the Democrats as the obstacle to the wall but in his first two years it was his fellow Republicans in Congress that expressed misgivings- as some Republican lawmakers said-people can come around it, under it and through it. In February polls showed 60% of Americans opposed major new construction of walls along the border of US and Mexico border. In September, the Pentagon announced it will suspend or delay 127 construction projects so that $3.6 billion can be diverted to shore up Trump's border wall. Many see this as a violation of Congress's authority to set spending.
And at those rally's back on the campaign trail "BUILD THE WALL" Trump "Who's going to pay for the wall"? Crowd: "Mexico"
Scene: Kid in school didn't bring in his homework. The teacher: "Don't tell me
the dog ate it"? Kid "No the democrats took it"
Reality   |     |   Comment #72
For the same reason the dems did not address the border when they had the majorities. It is quite difficult to create and pass legislation and the president has no magic wand. Our system is designed to make it difficult to enact new laws. The purpose is to limit the scope of government in your life. Individual liberties are the heart and soul of the American experiment!
deplorable 1
deplorable 1   |     |   Comment #55
On the Interest rate issue yes. But he is very connected on jobs, pay and the economy as well as the border.
111   |     |   Comment #69
# 47 said "[Trump is] the same guy who thinks you need a photo ID to buy groceries." Let's be a bit more honest about that, shall we, and add back some context? He was talking specifically about the difference between voting (in some states voters are not required to show ANY ID), and the fact that every grocery store in the US has a definite right to request ID if you are paying via check or credit card, in order to reduce fraud. The fact that many grocery stores do not always exercise this right does mean that they don't have it.
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