At the completion of its two-day FOMC meeting, the Fed issued a statement very similar to its April statement. As expected, there were no policy changes. The big news was in the Fed’s Summary of Economic Projections (SEP). The SEP dot plot shows that the majority of the Fed now think that there’ll be rate hikes by the end of 2023.
Today’s FOMC statement only had minor changes from the April statement. First, the Fed removed the opening statement about the pandemic “causing tremendous human and economic hardship.” That sentence has been replaced by a sentence regarding progress on vaccinations in reducing the spread of the pandemic.
The most important change in the statement was a change of one word. That change marked the acknowledgement in the recent rise of inflation. In the section describing the Fed’s new inflation framework, the statement no longer says that inflation is running below their target:
Excerpt from the April FOMC statement:
With inflation running persistently below this longer-run goal,...
Excerpt from the June FOMC statement:
With inflation having run persistently below this longer-run goal,...
Everything else in the June statement was the same as the April statement. The zero interest rate policy and the asset purchases remain the same, and like April, there was no dissent. All eleven voting members of the FOMC voted for the monetary policy action in the statement.
Summary of Economic Projections
The Fed also released updates to its Summary of Economic Projections (SEP) which includes federal funds rate forecasts (the dot plot) that extend out through 2023. The big news for savers is that the dot plot now shows rate hikes in 2023 that increases the federal funds rate by 50 bps.
The new SEP shows that 13 FOMC participants are forecasting rate hikes by the end of 2023. The March SEP showed only 7 participants forecasting rate hikes. Out of those 13 participants, 11 are anticipating more than just a 25-bp rate hike by 2023. Three are anticipating a 50-bp higher rate, three are anticipating a 75-bp higher rate, three are anticipating a 100-bp higher rate, and lastly, two are anticipating a 150-bp higher rate. That results in a median forecast that the rate will be 50-bp higher by the end of 2023.
The federal funds rate forecast for the end of 2022 also changed. The June SEP shows that 7 FOMC participants are forecasting at least one rate hike by the end of 2022. That’s up from 4 in March. However, that didn’t change the median forecast. That remains at 0.1% (the middle of the 0-0.25% range).
In addition to the dot plot, there were big changes in the inflation and GDP median forecasts for 2021. The Fed’s preferred inflation measure, the core PCE, is forecasted to increase 3.0% in 2021. That’s a large increase from their March forecast of 2.2%. The GDP is forecast to increase 7.0%, up from 6.5% in March.
The forecasts for 2022 changed little, which indicates that the Fed views the current inflation rise as just transitory. The core PCE for 2022 is forecast to rise 2.1%, up from 2.0% in March, and for 2023, both the June and March forecasts are the same at 2.1%.
After the FOMC statement came out, Fed Chair Jerome Powell held a press conference that included providing an opening statement and taking questions from reporters.
One thing that Fed Chair Powell did in the press conference was to downplay the importance of the dot plot by saying that the forecasts should be taken with a “big grain of salt.” Of course the federal funds rate forecasts are based on assumed economic progress, and as we saw from 2008 to 2016, the dot plots have often been too optimistic.
Fed Chair Powell pushed hard on the claim that the recent high inflation readings are just transitory. In his opening remarks, he specifically mentioned the SEP inflation forecasts:
As these transitory supply effects abate, inflation is expected to drop back toward our longer-run goal, and the median inflation projection falls from 3.4 percent this year to 2.1 percent next year and 2.2 percent in 2023.
Fed Chair Powell gave only a few small hints about the timeline of tapering its asset purchases (the monthly purchase of $80 billion in Treasury securities and $40 billion in agency mortgage-back securities). He had an interesting description of the FOMC’s tapering talk:
You can think of this meeting that we had as the ‘talking about talking about’ meeting, if you’d like. I now suggest that we retire that term, which has served its purpose.
Fed Chair Powell assured the press that the FOMC was “a ways away “ from declaring “substantial further progress” has been achieved. That’s the formal criteria that the Fed has specified in the FOMC statement before tapering would begin. Fed Chair Powell also assured the press that the Fed would be careful to signal that the taper announcement is being planned. In summary, tapering is unlikely to be announced before Q4 of this year.
Interest Rate on Excess Reserves (IOER) and Overnight Reverse Repo (RRP) Rate Changes
One little-known change that was announced by the Fed today was a very small tightening move. This was in the Fed’s implementation note, and it was mentioned briefly at the end of Fed Chair Powell’s opening remarks:
we made a technical adjustment today to the Federal Reserve’s administered rates. The IOER and overnight RRP rates were adjusted upward by 5 basis points in order to keep the federal funds rate well within the target range and to support smooth functioning in money markets. This technical adjustment has no bearing on the appropriate path for the federal funds rate or stance of monetary policy.
As mentioned in this ING analysis of today’s Fed meeting, these rate hikes are “designed to coax up rates on the front end of the curve.” The effects may already be evident in the short-dated Treasury yields. The 1-month, 2-month and 3-month Treasury yields all increased to 0.04% today. They haven’t been this high since March.
Future FOMC Meetings
The remaining 2021 FOMC meetings are scheduled for July 27-28, September 21-22, November 2-3, and December 14-15. The September and December meetings will include the Summary of Economic Projections.
Treasury Yield Changes
The change in the Fed’s dot plot with rate hikes forecasted for 2023 appeared to have been the main driver pushing up Treasury yields today. The IOER and overnight RRP rate changes were also a factor on the short end. The list below shows how the Treasury yields changed today. The 5-year yield had the largest increase with a rise of 10 bps.
- 1-mo: 0.02% → 0.04%
- 3-mo: 0.03% → 0.04%
- 6-mo: 0.05% → 0.06%
- 1-yr: 0.08% → 0.08%
- 2-yr: 0.16% → 0.21%
- 5-yr: 0.79% → 0.89%
- 10y: 1.51% → 1.57%
- 30y: 2.20% → 2.20%
Future deposit rates
If the Fed is correct on inflation, Fed rate hikes are unlikely before 2023. Fed rate hikes in 2023 would require a sustained and strong economic recovery. That would probably be the best case for savers. Any disappointments in the economic recovery will very likely push out rate hikes, just like we saw in the period from 2011 to 2017.
If the Fed is wrong about inflation and higher inflation proves not to be transitory, the Fed may be forced to hike rates in 2022. The risk of this scenario is that it could wreck the economy that’s so debt dependent. Due to this risk, the Fed may choose to hold on to the transitory claim. That might be the worst case for savers as deposit rates stay low while inflation keeps rising. If the Fed does hike rates like Paul Volcker did in the 80s, we will see higher rates, but I wouldn’t expect high rates to last long if a recession results. As we saw last year, the Fed can act very quickly in cutting rates.
Strategies for savers to maximize cash yield
With current CD rates that are at record lows, there’s little to gain in locking in on long-term CDs. That’s especially the case if we see higher rates in 2023.
For fairly small balances, two options to consider are I Bonds and high-yield reward checking accounts. The Series I Savings Bonds will ensure your savings keep pace with inflation (at least inflation as measured by the CPI). The main issue with I Bonds is that you’re limited to just $10k per year per SSN (plus $5k with your tax refund). I have more details on I Bonds in this post.
Reward checking accounts have a similar small-balance issue. High rates only apply to balances that typically range from $10k to $25k. Unlike I Bonds, you have to be willing to do the work to earn the high yields on the reward checking accounts by meeting the debit card usage requirements. There are a few reward checking accounts (with linked savings accounts) that do offer high rates on larger balances. These rates can be much higher than the average online savings account rate, and the balances can be between $100k and $200k. I listed a few nationally available ones in my latest weekly summary.
As we have seen in the last 12 years, higher rates are not a sure thing. It’s quite possible that rates will remain at record lows past 2023. So you may not want to give up on CDs. For example, a 49-month CD at 1.40% APY could provide 3x the interest as compared to an online savings account that may average only 0.45% for the next 49 months (see my latest weekly summary.)
If you can get CDs with rates well over 1%, they still might be worth it for at least some of your savings just in case we’re headed into a very long zero rate period.
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 should happen to rise, choose long-term CDs with early withdrawal penalties of no more than six months of interest.
For your safe money, a combination of I Bonds, reward checking accounts, online savings accounts and CDs can still make sense.