At the completion of its two-day FOMC meeting, the Fed issued a statement that had the one important addition that points to a taper announcement at the Fed’s next meeting (November 2-3):
If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted.
The only other change from the July FOMC statement was the recognition that the latest COVID-19 wave has impacted the economic recovery:
The sectors most adversely affected by the pandemic have improved in recent months, but the rise in COVID-19 cases has slowed their recovery.
Everything else in today’s FOMC statement was the same as the July statement. The statement continues to claim that the recent high inflation is transitory. “Inflation is elevated, largely reflecting transitory factors.” The zero interest rate policy and the asset purchases remain the same, and like July, 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 big news for savers came from the new federal funds rate forecasts (the dot plot) in the updated Summary of Economic Projections (SEP). The dot plot now shows a rate hike in 2022. In the June SEP, the dot plot showed the first rate hike not coming until 2023.
In the June SEP, 7 out of 18 FOMC participants anticipated at least one rate hike by the end of 2022. Today’s SEP shows an additional two participants who are anticipating the 2022 rate hike. So now half are anticipating no rate hike in 2022 and half are anticipating at least one rate hike.
In the June SEP, 13 out of 18 FOMC participants anticipated at least one rate hike by the end of 2023. Today’s SEP shows 17 are now anticipating higher rates in 2023. Only one of the 18 anticipate that we’ll still be waiting for liftoff. Half of the participants anticipate that the federal funds rate will be 0 to 75 bps higher by the end of 2023. The other half anticipate that it’ll be between 100 and 150 bps higher by the end of 2023.
This is the first SEP with 2024 projections. Today’s SEP shows all FOMC participants anticipating higher rates in 2024. Half of the participants anticipate that the federal funds rate will be between 50 to 150 bps higher by the end of 2024. The other half anticipate that it’ll be between 175 and 250 bps higher by the end of 2024.
The anticipated longer run value of the federal funds rate remains at 2.50%.
The SEP also includes forecasts on inflation, GDP and unemployment rates.
Inflation forecasts for 2021 were revised up substantially. The June SEP had a 2021 forecast for Core PCE at 3.0%. That was increased to 3.7%. However, future years had much smaller upward revisions which means that most of the Fed still claim that the current high inflation is just transitory. Core PCE for 2022 is now anticipated to be 2.3%, up from the June forecast of 2.1%. Core PCE for 2023 is now anticipated to be 2.2%, up from the June forecast of 2.1%. The new 2024 forecast has Core PCE declining to 2.1%.
In the statement, the Fed noted that the recent rise in COVID cases has impacted the economy. This can be seen in the 2021 revisions of GDP and unemployment rate forecasts. The GDP forecast declined from 7.0% to 5.9% for 2021. The unemployment rate forecast increased from 4.5% to 4.8%. The Fed thinks this weakness will be reversed in 2022. The GDP forecast was revised up from 3.3% to 3.8% for 2022. The unemployment rate forecast remains unchanged at 3.8%.
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.
Fed Chair Powell’s opening remarks included an explanation about why they still think that the recent high inflation is transitory. It also included an acknowledgement that inflation has risen more than they had anticipated earlier in the year:
Inflation is elevated and will likely remain so in coming months before moderating. As the economy continues to reopen and spending rebounds, we are seeing upward pressure on prices, particularly because supply bottlenecks in some sectors have limited how quickly production can respond in the near term. These bottleneck effects have been larger and longer lasting than anticipated, leading to upward revisions to participants inflation projections for this year. While these supply effects are prominent for now, they will abate, and as they do inflation is expected to drop back toward our longer-run goal. The median inflation projection from FOMC participants falls from 4.2 percent this year to 2.2 percent next year.
The first question asked by reporters was on the taper timeline. Fed Chair Powell replied with strong hints that taper will likely be announced at its next meeting (November 2-3):
I guess my own view would be that the test, the test for substantial further progress for employment, is all but met. And, so once we’ve met those two tests…once the committee decides that they’ve met..and that could come as soon as the next meeting…That’s the purpose of that language…is to put notice out that that could come as soon as the next meeting. The committee will consider that test and will also look at the broader environment at that time and make a decision whether to taper.
Later in the press conference, a reporter asked if another weak jobs report could derail the taper announcement. Fed Chair Powell suggested that the next jobs report doesn’t have to be great for the Fed to go forward with tapering:
It is the accumulated progress. So, for me, it wouldn’t take a knockout, great, super-strong employment report. It would take a reasonably good employment report for me to feel like that test is met. And others on the committee, many on the committee, feel the test is already met. Others want to see more progress, and, you know, we’ll work it out as we go. But I would say that, in my own thinking, the test is all but met. So, I don’t personally need to see a very strong employment report, but I would like to see a good, a decent, employment report. I mean it’s not, again, it’s not to be confused with the test for liftoff, which is so much higher.
Based on Fed Chair Powell’s press conference, it looks very likely that we’ll see a formal taper announcement at the Fed’s next meeting (November 2-3). In the last cycle, it took two years after the formal taper announcement (December 2013) before rate liftoff (December 2015). It seems likely that liftoff will be faster this time, but a lot depends on how the economy evolves.
Future FOMC Meetings
The remaining 2021 FOMC meetings are scheduled for November 2-3 and December 14-15. The December meeting will include the Summary of Economic Projections.
Treasury Yield Changes
The change in the Fed’s dot plot with rate hikes forecasted for 2022 appeared to have some minor impacts on Treasury yields today. Small yield increases occurred on 6-month, 1-year, 2-year and 5-year yields. The 2-year yield had the largest increase with a rise of 3 bps.
- Sep 21th → Sep 22nd
- 1-mo: 0.05% → 0.04%
- 3-mo: 0.03% → 0.03%
- 6-mo: 0.04% → 0.05%
- 1-yr: 0.07% → 0.08%
- 2-yr: 0.22% → 0.25%
- 5-yr: 0.84% → 0.86%
- 10y: 1.33% → 1.32%
- 30y: 1.86% → 1.84%
Future deposit rates
If there is a Fed rate hike near the end of 2022 and if the Fed continues rate hikes in 2023, we may see some online savings account rate hikes in late 2023. It appears rate increases may come faster this time compared to the last zero rate cycle when the Fed did a one-year pause of rate hikes after liftoff in December 2015. Of course, if the economy has troubles, the Fed won’t think twice about pushing out future rate hikes. That is what happened in 2016.
When the Fed finally started to regularly hike rates in 2017, we saw some online savings account rate hikes. So it’ll probably take at least three or four Fed rate hikes (assuming 25-bp rate hikes) before banks start responding. It may take longer this time due to the record high levels of deposits at banks.
We will likely see rate hikes sooner on CDs. We saw that when taper began in 2013 and 2014. Longer-term CD rates will likely see more upward movement. We have already seen some small CD rate increases this year. That may continue as tapering begins. However, I think it’s unlikely we’ll see large CD rate increases until the Fed has hiked rates multiple times.
If the Fed is wrong about inflation and higher inflation proves not to be transitory, the Fed may be forced to hike rates much faster in 2022 and 2023. Three FOMC participants are anticipating two rate hikes in 2022 and four rate hikes in 2023. Those three may not be so sure about the transitory claim.
If high inflation does force the Fed to be more aggressive with rate hikes, there’s a question about how that will impact the economy. I worry about this negatively impacting the markets and the economy due to the economy’s dependence on debt and ultra-easy monetary policy. If a fast and large increase in rates results in a recession, high rates may not last long.
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 2022.
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).
I Bonds purchased before November will likely have a very attractive rate due to recent high inflation. On October 13th, CPI numbers for September will be released, and we’ll be able to determine the I Bond rate for the next 12 months. The first 6-month period will have the current I Bond rate of 3.54%. The second 6-month period will almost certainly be much higher. This TipsWatch post estimates this rate based on CPI numbers through August:
The I Bond’s new inflation-adjusted variable rate is on track to increase to 6.56%, annualized, for six months. One month of data remains.
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. There are ways to buy more I Bonds. This article at The Finance Buff describes how a married couple can buy up to $65k in I Bonds each calendar year.
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 bi-weekly liquid account 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 47-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 47 months (see my bi-weekly CD rate 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. You can calculate the effective yields when you close CDs early by using the CD EWP Calculator.
For your safe money, a combination of I Bonds, reward checking accounts, online savings accounts and CDs can still make sense.