With the Fed’s zero rate policy in a holding pattern for the foreseeable future, two other factors will influence deposit rate changes this year.
First, the deposit and loan levels at the banks will likely put downward pressure on deposit rates. The latest stimulus checks from the government will only add to the record level of deposits at banks and credit unions. When banks are flush with deposits, they will more likely drop their deposit rates.
If loan balances increase more than deposit levels, that can increase the demand for deposits at banks as they use deposits to fund new loans. The latest bank data continues to show the opposite.
Large banks are reporting their Q1 earnings this week, and loan growth will be a major factor that impacts earnings. Widespread loan growth isn’t expected until the second half of the year as described in this Yahoo Finance article:
"Loans are coming in weaker than expected in 1Q... and may be sluggish again in 2Q given likely further deleveraging from fiscal stimulus (and tax returns) and as [the] COVID-19 vaccine rollout will take a good portion of the quarter
Last week, Fed data released on April 2nd showed that deposits in the banking industry increased $120 billion for the two-week period ending on March 24th. For that same period, loans fell by $99 billion.
This week, Fed data shows that deposit levels actually declined a bit. Fed data released on April 9th showed that deposits in the banking industry declined $16.4 billion from March 24th to March 31st. For that same period, loans fell by $12.5 billion.
The second factor that may impact deposit rates this year is the economy and Treasury yields.
The big economic news today was inflation and the release of the March Consumer Price Index (CPI). The CPI increased 0.6% in March, which was slightly above expectations (0.5%). According to the Bureau of Labor Statistics, this March 1-month increase was the largest rise since a 0.6% increase in August 2012. Core CPI (which excludes food and energy) increased 0.3% in March, also slightly above expectations (0.2%).
The year-over-year CPI gain was 2.6%, which according to CNBC, the gain was the highest since August 2018. The core CPI increased 1.6% year over year. The year-over-year surge was due to the CPI drop that occurred last March when the pandemic and the shutdowns began. Another high year-over-year rise is expected next month, but the Fed is expecting that this inflation increase will be temporary. The markets seem to agree. The 10-year Treasury yield has been falling today after the CPI data was released. We’ll keep an eye on future CPI releases. If inflation keeps exceeding the Fed’s expectations, that could force them to hike rates sooner. However, the Fed is prepared to tolerate higher inflation for some time.
Let’s hope rising inflation doesn’t become an issue, and let’s hope that the US economy doesn’t experience stagflation, which is defined as persistent high inflation combined with high unemployment and stagnant demand in the economy. Last week, DA reader P_D provided a scenario in the comments describing how stagflation could develop from government policies. The high unemployment from stagflation would likely prevent the Fed from hiking rates. How much rising inflation would the Fed tolerate in such a scenario is unknown. One thing for sure is that this economic condition would be especially difficult on savers as the inflation rate far exceeds safe rates of returns available from savings accounts and CDs.
Long-dated Treasury yields have surged this year as signs grow of a strong economic recovery and rising inflation. However, Treasury yield increases have taken a break in the last week. Yields have fallen a bit. As of yesterday’s market close, the 10-year Treasury yield was 1.69%, down from 1.73% last week. The 5-year yield was down 5 bps, falling from 0.94% to 0.89%. The short-dated Treasury yields with terms of one year and under remain close to zero.
Treasury yields will likely end today lower according to this afternoon MarketWatch article.
The slight odds of a 2021 Fed rate hike have gone down according to the CME FedWatch Tool, which lists implied probabilities of future target federal funds rate hikes based on the Fed Funds futures market. The odds of a rate hike by the December Fed meeting went down in the last week from 8.6% to 3.9%. I suggest not taking these slight odds too seriously. Based on what the Fed has been saying, these slight odds would be more reasonable for 2022 or 2023 even if inflation surges higher this year.
Treasury Yields (Close of 4/12/2021):
- 1-month: 0.02% down 1 bp from 0.03% last week (0.20% a year ago)
- 3-month: 0.02% down 1 bp from 0.03% last week (0.25% a year ago)
- 6-month: 0.04% same as last week (0.24% a year ago)
- 1-year: 0.06% same as last week (0.25% a year ago)
- 2--year: 0.18% up 1 bp from 0.17% last week (0.23% a year ago)
- 5--year: 0.89% down 5 bps from 0.94% last week (0.41% a year ago)
- 10-year: 1.69% down 4 bps from 1.73% last week (0.73% a year ago)
- 30-year: 2.34% down 2 bps from 2.36% last week (1.35% a year ago)
Fed funds futures' probabilities of future rate changes by:
- Apr 2021 - up by at least 25 bps: 3.9%, up from 0.6% last week
- Sep 2021 - up by at least 25 bps: 3.9%, down from 4.5% last week
- Dec 2021 - up by at least 25 bps: 3.9%, down from 8.6% last week
CD Interest Rate Forecasts
No major online bank had CD rate changes in the last week.
There were a few minor online banks that made CD rate cuts. There were actually a couple of rate increases. Two minor online banks had small rate hikes. Popular Direct increased the rate of its 5-year CD from 0.80% to 0.85%, and M.Y. Safra Bank increased the rate of its 2-year CD from 0.40% to 0.56%.
The start-of-the-month rate change surge ended at credit unions. There were only three noteworthy CD rate changes at credit unions in the last week. All were rate cuts except the 6-month CDs at Michigan State University FCU. For a change, Michigan State University FCU didn’t continue its trend of rising long-term CD rates. In recent weeks, its 5-year Jumbo CD rates had risen to rate leader status. Its 5-year Jumbo rate fell 6 bps in the last week to 1.40%. That’s still near the top for 5-year nationally available CDs.
Overall, CD rates are still falling, but the declines have been shrinking in the last few months. That trend continues in March as can be seen in our Online 1-year CD Index which tracks the average rate of 10 well-established online 1-year CDs. The average was 0.44% on April 1st, a one basis point decline from March 1st.
The Online 1-year CD Index had its largest drop March 2020 when it fell almost 50 basis points. From April through September 2020, the monthly declines mostly ranged from 10 to 20 basis points. The monthly declines shrunk to 4 to 5 basis points in October and November. The monthly declines have shrunk to one basis point or less from December through March.
As can be seen in our Online 5-year CD Index which tracks the average rate of 10 well-established online 5-year CDs, the decline of 5-year online CD rates has been similar to the 1-year decline except that the early decline was actually steeper. Like the 1-year Index, the monthly declines of the 5-year Index have shrunk in recent months with very little decline from December through March. On April 1st, the average was 0.65%, a decline from 0.66% on March 1st.
I’m only including one to three CD rate changes per institution to avoid an overload of data. All percentages listed below are APYs.
- Michigan State University FCU (5yr Jbo 1.46% → 1.40%, 6m Jbo 0.45% → 0.50%)
- Evansville Teachers FCU (30m 0.95% → 0.90%, 14m 0.75% → 0.65%)
- PopularDirect (5yr 0.80% → 0.85%)
- INSBANK Online (3yr 0.80% → 0.75%, 1yr 0.55% → 0.50%)
- Hiway CU (2yr 0.75% → 0.70%)
- M.Y. Safra Bank (2yr 0.40% → 0.56%, 1yr 0.60% → 0.56%)
- Virtual Bank (5yr 0.60% → 0.55%)
- ableBanking (4yr 0.70% → 0.55%, 1yr 0.55% → 0.40%)
- MutualOne Bank (61m 0.70% → 0.55%, 1yr 0.60% → 0.45%)
I’ll have more discussion of the CD rate changes in my CD summary later today.
Synchrony Bank was the one major online bank that lowered its savings account last week. Its High Yield Savings account yield fell from 0.50% to 0.40%. Synchrony joins other major online banks including Capital One, Discover, American Express, Barclays and PurePoint Financial with a 0.40% online savings account. It appears this may be the bottom. We’ll see if any of these major online banks decide to go lower. There are several small online banks that have gone lower such as ableBanking which just lowered its Money Market Savings rate from 0.50% to 0.35%.
Our Online Savings Account Index which tracks the average rate of 10 well-established online savings accounts was 0.47% on April 1st, a fall from 0.48% on March 1st. Online savings account rate declines are slowing as compared to last year. However, there continues to be a small drop after each new month.
Below are examples of important savings and money market rate changes in the last week. As is the case with the CD rates, I’ve included only rate changes from the online savings accounts that DA readers would be most interested in. All percentages listed below are APYs.
- Popular Direct Select Savings (0.55% → 0.50%)
- Synchrony High Yield Savings (0.50% → 0.40%)
- MutualOne Bank Online Savings (0.45% → 0.40%)
- ableBanking Money Market Savings (0.50% → 0.35%)
Economic and Deposit Rate Scenarios in 2021
With a new year, it’s time for new scenarios about how the economy and interest rates will evolve over the next year. A rise in interest rates will almost certainly require a steady and strong economic recovery. So future interest rates depend heavily on the future health of the economy.
It’s possible that interest rate increases could be caused by a sustained period of rising inflation. In this case, the Fed may be forced to hike rates even if the economy hasn’t recovered. Based on history, the odds of this happening appear low. However, as I described above, the odds of this appear to be rising. For now, I’ll exclude this scenario.
There’s always the possibility of major shocks to the economy that could cause a depression. A depression would almost surely result in the zero rate environment to continue for at least the next decade. The odds of this are also low.
I think one of the following three scenarios is most likely to occur over the next decade:
- Strong and fast economic recovery
- Slow economic recovery
- No sustained economic recovery
Of course, a quick economic recovery would be the best case scenario for deposit rates, but even in that case, the Fed won’t be in a hurry to raise rates. Their new inflation framework will likely cause them to be slower in their rate hikes than they were in the last zero rate period. In the Fed’s March Summary of Economic Projections, no FOMC participant expects a rate hike in 2021. Only four out of the 18 expect a 25-bp rate hike by the end of 2022. Seven expect at least one rate hike by the end of 2023. So in this best case scenario, the Fed will start hiking rates by either the end of 2022 or 2023. As we learned in 2015 and 2016, it can still be a long time from the first Fed rate hike to when we see significant increases in deposit rates. It took about 18 months after the first Fed rate hike in December 2015 before we started to see widespread deposit rate increases.
There are many things that could prevent a strong economic recovery. These include a pandemic that doesn’t go away and government policies that inhibit growth. If economic growth is weak, that will push out the Fed’s first rate hike. In this case, we could see this zero rate period be close in duration to the last one. If it matches the duration exactly, the first Fed rate hike wouldn’t come until March 2027.
Out of the three scenarios, the worst case would result in the Fed holding rates near zero for a period that would be longer than the last one, which lasted seven years. In this scenario, the economy remains weak with high unemployment and low GDP. The economy would have to improve and force inflation to rise in a sustained fashion before the Fed would even think about rate hikes.
Before the Fed starts to hike rates, it’s possible that we’ll see small gains in CD rates. Based on the 2013-2014 history, the start of the Fed tapering its asset purchases could be the first sign of higher CD rates. In May 2013, the Fed Chair started to signal that a pull back or taper of its asset purchases was being considered. The first small pull back was announced by the Fed in December 2013. This period is known as the Taper Tantrum, and Treasury yields did have significant increases in 2013 and 2014. CD rates also had increases.
The Taper Tantrum period of 2013 and 2014 was a time when CD rates went up even as the Fed was holding steady with rates near zero. PenFed’s 5-year CD yield was 1.15% from May to August, 2013 (pre-2020 all-time low). PenFed’s 5-year CD yield increased to 3.04% In December 2013 and January 2014. Ally Bank’s 5-year CD yield increased from 1.51% in May 2013 to 2.00% in September 2014. Synchrony Bank’s 5-year CD yield increased from 1.51% in April 2013 to 2.30% in April 2014, and Discover Bank’s 5-year CD yield increased from 1.50% in October 2013 to 2.10% in August 2014.
The rising long-term Treasury yields in the last three months have contributed to the rise of long-term brokered CD rates. This may lead to a rise of long-term direct CDs in 2021. However, one thing that is different today than in 2013 and 2014 is the surge of deposits at banks and credit unions. The government stimulus checks combined with lower leisure spending in 2020 have contributed to record deposit increases at banks and credit unions. Most banks don’t need deposits, and thus, they are free to lower deposit rates to record low levels. This helps explain why even some online banks are offering incredibly low deposit rates (as examples, Citizens Access 1-year Online CD at only 0.10% and Barclays 5-year online CD at only 0.25%).
Future Rates and CD Term Decisions
It’s possible that we will see a strong economic recovery in 2021 and that will cause the Fed to signal that it’s thinking about tapering its asset purchases. If that happens, we may see some CD rate gains, especially on 5-year CDs, by the end of 2021 or in the first half of 2022. A strong economic recovery also has other effects that contribute to rising deposit rates. A strong economy results in higher loan demand which requires increased deposits. Also, a rising stock market encourages investors to move money from cash into stocks. That lowers deposit levels at banks.These factors encourage banks and credit unions to raise deposit rates.
In the 2013-2014 Taper Tantrum period, 5-year CD rates at online banks increased 50 to 80 basis points. Larger rate increases occurred at a few credit unions. PenFed had some of the largest increases. Its 5-year rate increased almost 200 basis points. If we see similar rate increases in the next two years, we could see top 5-year CD rates at online banks be in a range from 1.50% to close to 2.00%. We could see some CD specials at credit unions with rates above 2.00%.
With at least some possibility of 2% CD specials in 2021 or 2022, locking into long-term CDs with rates near 1% and below doesn’t seem like a good strategy. The possibility of an inflation surge also doesn’t make long-term CDs appealing. If we do start to see 2% CDs in the next two years, it’ll be better to keep cash in online savings accounts or reward checking accounts. Then you’ll be able to jump on those CD specials when they appear. The risk that inflation surges and the Fed is forced to raise rates is another reason to keep your money in liquid accounts.
Long-term CDs now only make sense if we’re headed back into a long period of very low rates. In that case a 1% long-term CD will be better than a top savings account with a rate near 0.50%.
During the zero-bound years from 2008 to 2015, online savings account rates remained in a range of 0.70% to 1.00%. There was little to gain with CDs that didn’t have yields higher than this. In today’s new zero rate environment, it appears we are near a bottom for deposit rates. My best guess for this new range for online savings account rates is 0.40% to 0.70%. If you do want to hold CDs, at least make sure that the CD rate is at least higher than 0.70%.
The difficult decision for savers is trying to decide when it’s the right time to lock into long-term CDs. When you see a new higher rate, is it a sign that higher rates are coming which suggests you should wait? Or if you see that a CD rate has reached a certain high (like 2% or 3%), should you acquire that CD? As I mentioned above, it may seem prudent to wait, but as we’ve seen in the past 10 years, rates rarely rise as much as we expect.
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. 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 from March 2020 to April 2021. The average rates for CDs of all terms are now at 5-year lows. The previous lows occurred more than five years ago in December 2015, just before the Fed’s first rate hike. The average savings account rate (0.139%) is also at a 5-year low. The previous low was 0.177% in December 2016.