Signs still point to the Fed holding steady on rates for at least the first half of 2019. As more economic data comes out in the coming months, we’ll have a better idea on the odds of Fed rate hikes in the second half of 2019. Recent economic data does point to a slowdown in 2019, but that doesn’t mean that a recession is coming. Economist Tim Duy described this condition in his recent Fed Watch blog post. In his bottom line, he says:
The economy is set to slow in 2019 and such an outlook is supported by early indicators. Slowing is not recession.
If the slowdown is minor, it might just mean a rate pause from the Fed. However, if the slowdown deepens, we could see a Fed rate cut before the end of 2019.
It should be noted that when the Fed ended its rate hikes in June 2006, it held steady until September 2007 when it started to cut the federal funds rate. If history repeats, that means the Fed won’t be in a rush to cut rates, but it also means that we won’t see rate hikes after a pause. Of course, there are many reasons to believe that things will be different than 2006-2007. That time was before the bursting of the housing bubble, the global financial crisis and the Great Recession. Also, the current federal funds rate (2.25% to 2.50%) is less than half of the federal funds rate in 2006-2007 (5.25%).
The minutes of the January Fed meeting are scheduled to be released on Wednesday. That may provide us more insights into what the Fed is thinking. The Fed’s next meeting on March 19-20 will be an important one in that it will confirm the start of the pause if the Fed holds rates steady. Also, the Fed will be releasing an updated “dot plot” which shows Fed member expectations on future federal funds rates. In December the “dot plot” suggested two rate hikes in 2019. That will likely drop to one or zero.
According to the Fed Fund futures, the odds of any Fed rate hike for the first half of 2019 are zero. The odds don’t increase much for the second half. They’re just under 2% for a rate hike by December. These odds were the same last week. The only change from last week is a slightly higher chance of a rate cut by December. It’s now 13.0%, up from 11.6% last week.
Treasury yields changed little from last week. The 2-year yield had the largest change, rising only 2 bps from last week. Consequently, that narrowed the 10-2 spread (the difference between the yields of the 10-year and 2-year Treasury notes) which is now 15 bps, down from 17 bps last week. A negative 10-2 spread has a history of preceding recessions.
Treasury Yields (Close of 2/19/19):
- 1-month: 2.44% same as last week (1.35% a year ago)
- 6-month: 2.52% up from 2.51% last week (1.83% a year ago)
- 1-year: 2.54% down from 2.55% last week (2.00% a year ago)
- 2--year: 2.50% up from 2.48% last week (2.21% a year ago)
- 5--year: 2.47% same as last week (2.63% a year ago)
- 10-year: 2.65% same as last week (2.87% a year ago)
- 30-year: 2.99% down from 3.00% last week (3.13% a year ago)
Fed funds futures' probabilities of future rate hikes by:
- Mar 2019 - up by at least 25 bps: 0.0% same as last week
- Jun 2019 - up by at least 25 bps: 0.0% same as last week
- Sep 2019 - up by at least 25 bps: 2.0% same as last week
- Dec 2019 - up by at least 25 bps: 1.8% same as last week
- Dec 2019 - down by at least 25 bps: 13.0% up from 11.6% last week
CD Interest Rate Forecasts
For the last several weeks I’ve been mentioning my opinion that many banks will end CD rate hikes, especially on long-term CDs, as long-dated Treasury yields decline and with very low odds of any 2019 Fed rate hike. Fortunately, we aren’t seeing any widespread CD rate cuts, and we are still seeing banks and credit unions coming out with competitive CD specials. However, I learned of a new reason to be pessimistic. The Federal Reserve recently published the Senior Loan Officer Opinion Survey on Bank Lending Practices. In the survey, it showed weakened demand for loans to businesses and households. Loan growth helps drive banks to raise deposit rates. So if loan demand weakens, that will put downward pressure on deposit rates.
As I mentioned last week, I think short-term CD rates will generally hold pretty steady until the odds of a Fed rate hike or cut grows. Long-term CD rates may have downward pressure for some time until we see strong economic data that increases the odds of a Fed rate hike.
If the economic data weakens and the Fed starts to suggest the possibility of rate cuts, we may then see widespread rate cuts on CDs.
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 March 2018.
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.