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.