As expected, no policy changes were announced today at the end of the two-day FOMC meeting. The Fed decided to hold off on a rate hike. The FOMC statement had nothing to suggest any change to their gradual rate hike policy which means that a December rate hike is very likely.
The economic overview in today’s FOMC statement was very similar to the September statement. There were only two changes. The description of the unemployment rate went from “stayed low” to “declined”. The other change was the “growth of business fixed investment” which went from “grown strongly” to “moderated from its rapid pace earlier in the year”. In summary, the FOMC statement had nothing to suggest any future changes to its current policy of gradual rate hikes.
Another thing to note about today’s FOMC statement was that there was no mention of the volatility in the financial markets that has occurred since the last FOMC meeting. This suggests the volatility is not enough to warrant concern in their decision making.
All voting members voted for today’s policy decision. There were no dissents.
December Fed Rate Hike Odds at 77.8%
The odds of a December Fed rate hike isn’t quite a sure thing according to the Fed fund futures as shown by the CME Group FedWatch Tool. The odds of a rate hike in December is now 77.8%. This combines a 71.4% chance of a 25-bps rate hike and a 6.4% chance of a 50-bps rate hike. On Tuesday, the odds were 79.3%. After the August Fed meeting, the odds for a September rate hike were 91.2%.
The odds that the Fed rate will be at least 50 bps higher in March (most likely a 25-bps rate hike in December and March) went up a little from Tuesday, rising from 57.2% to 60.4%.
Future FOMC Meetings
The next three FOMC meetings are scheduled for December 18-19, January 29-30, and March 19-20. The December and March meetings will include the summary of economic projections. All future meetings will have a press conference by the Chair.
Deposit Account Rate Predictions
An important issue for savers is the decision of how much of their savings should go into long-term CDs vs short-term CDs and savings accounts. As long as rates keep rising, long-term CDs don’t look attractive. That’s especially the case when long-term rates aren’t that much higher than short-term rates.
Today’s Top Deposit Rates and Comparison to August
The decision between long vs. short hasn’t been easy due to long-term CD rates that have been increasing. We now have a few 4-year and 5-year CDs at or above 4.00% APY. These CDs are from credit unions. A few credit unions have been offering higher rates on 5-year CDs than the internet banks. Currently, the highest 5-year CD rate that’s nationally available from a bank is 3.50% APY. The highest from the large and well-established internet banks is 3.10% APY.
Short-term CD rates have also been increasing. We now have a nationally-available 1-year CD at 3.00% APY. A few credit unions have also been offering higher rates on 1-year CDs than the internet banks. Currently, the highest 1-year CD rate that’s nationally available from a bank is 2.75% APY. The highest from the large and well-established internet banks is 2.68% APY.
Below are today’s top rates for nationally-available savings account, 1-year CD and 5-year CD. I also include the past top ones from August 1st (the last Fed meeting with no rate hike):
- Top Savings/Money Market Account Rate:
- 2.30% APY, Northpointe Bank, Ultimate Money Market, $25k to $1m (old rate in Aug: 2.25% APY, Northfield Bank, Online Platinum Savings - New Money, up to $100k)
- Top 1-Year CD (term equal to or close to one year):
- 3.00% APY, Greenwood Credit Union, 12-month CD, $1k minimum (old rate in Aug: 2.60% APY, CD Bank, 12-month CD, $10k minimum)
- Top 5-year CD (term equal to or close to five years):
Just like in August, the top 5-year CD rate had the largest increase (rising 55 bps vs. 40 bps for 1-year CDs). On the other hand, the top rates for savings and money market accounts only increased 5 bps. It should be noted that a promotional savings account rate of 2.50% APY was just discontinued at EBSB Direct. But even if the 2.50% APY were used as today’s top rate, the top savings and money market rate has only increased 25 bps from three months ago.
Future Deposit Rate Predictions
So based on the recent rate histories of the top CDs and savings accounts, we may see top CD rates that are around 50 bps higher three months from now. And top savings account rates should be around 25 bps higher three months from now. That would result in a top 5-year CD APY at around 4.50% and a top 1-year CD APY at around 3.50%. The top savings or money market account APY may be around 2.75%.
CD and Savings Account Strategies In This Rising Rate Environment
With CD rates rising this fast, it seems prudent to avoid long-term CDs until we see at least two or three straight Fed meetings with no rate hikes.
CDs with 1-year terms can make more sense, but you probably won’t earn significantly more interest in these than in savings accounts over a full year. You’ll start off earning more in the first half of the term, but during the second half, savings account rates will likely be earning more than the CD. If you average out the interest earned in the savings account, it will likely be similar to the 1-year CD.
An example of comparing a savings account with a 1-year CD over a year in today’s interest rate environment can be seen by using Ally Bank. One year ago, the Ally Online Savings Account had a 1.25% APY. Today, it has a 1.90% APY. A rough average of the yield in the last year is 1.58%. A year ago, the top-tier rate of the Ally 12-month High Yield CD was 1.65%. As you can see, you would have earned just a little bit less in the savings account.
The one obvious downside with most CDs is the early withdrawal penalty. If you come across a hot CD deal and you want to fund it with an existing CD, you’ll be hit with an early withdrawal penalty.
Another downside with a CD is that it makes it more difficult to quickly deploy the funds when hot CD deals arise. If you need the funds for a hot CD, you’ll need to close the existing CD and transfer the funds to a savings or checking account that can be used to fund the new hot CD. Some banks like Ally can quickly close CDs and transfer the funds to an internal checking or savings account where the funds can be immediately available. That’s not always the case with some institutions.
Of course if you want to keep things simple with your safe money, a CD ladder is always a reasonable option. The ladder ensures you take advantage of higher rates as interest rates rise. You may want to favor shorter-term CDs for your ladder. However, beware of short-term CDs with terms under one year. At many internet banks, rates of CDs with terms of under one year continue to be well below savings account rates. These short-term CDs don’t make any sense. If you’re starting a CD ladder, don’t choose short-term CDs with rates under savings account rates.