The Fed’s Pause Continues - Rate Predictions & CD Strategies for 2019

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As expected, the Fed reaffirmed its “patience” policy by holding steady with the federal funds rate target. The post-meeting statement contained the same patience language that was in previous meeting statements:

In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.

One change from the March statement is the description of growth of economic activity. In March, the statement read, “growth of economic activity has slowed from its solid rate in the fourth quarter.” Today’s statement read, “economic activity rose at a solid rate.” This change should reduce the odds of a 2019 Fed rate cut.

However, another change raises the odds of a 2019 rate cut. That change is the Fed’s view of inflation. Today’s statement clearly admits that core inflation has declined and is running below the Fed’s target:

On a 12-month basis, overall inflation and inflation for items other than food and energy have declined and are running below 2 percent.

In March, the statement read, “inflation for items other than food and energy remains near 2 percent.”

Fortunately, the Fed still views these low inflation measurements as transitory. In the post-meeting press conference, Fed Chair Jerome Powell did warn that if inflation were to run persistently below their target for a sustained period of time, it would impact their policy decisions. The Fed Chair claimed that they are “strongly committed to [the] 2% inflation objective and to achieving it on a sustained and symmetric basis.” If inflation continues to run low, the Fed may cut rates to prove they are serious about this claim, even with strong economic growth. However, I don’t see the Fed acting quickly in this direction. Unless the economy experiences a significant slowdown, low inflation probably won’t force the Fed to cut rates until late 2019 at the earliest.

This policy action was an unanimous decision with no policymaker dissenting.

Federal Funds Rate Futures

The federal funds rate futures as shown by the CME FedWatch Tool continue to show zero chance of a Fed rate hike in 2019. However, the odds of a rate cut have gone down from yesterday. The futures now show only a 6.7% chance of a rate cut at the June meeting. That’s down from 22.0% yesterday. The futures now show a 52% chance of a rate cut by December. That’s down from 66% yesterday.

Future FOMC Meetings

The next three FOMC meetings are scheduled for June 18-19, July 30-31, and September 17-18. The June and September meetings will include the summary of economic projections. All meetings now include a press conference by the Fed Chair.

What Savers Should Expect in 2019

With little chance that the federal funds rate will rise this year, online savings account rates may be at a peak. Several online savings account rates are already near the top of the target range of the federal funds rate (2.25% to 2.50%). The well-established internet banks like Ally and Discover Bank have online savings account rates just below this range while the newer internet banks that are being more aggressive have rates that are in this range. These internet banks include PurePoint Financial, Rising Bank, Vio Bank and Citizens Access. As long as the Fed holds steady, I doubt we’ll see much movement in these savings account rates.

CD rates forecasting is more difficult. Several other factors in addition to movement (or lack of) in the federal funds rate impact this. Low inflation is one thing that is producing downward rate pressure. This is seen first in the Treasury market. Long-dated Treasury yields have been falling since November.

On November 8, 2018, the 10-year and 5-year Treasury yields were 3.24% and 3.09%, respectively. After the last Fed meeting on March 20th, the 10-year and 5-year Treasury yields were 2.54% and 2.34%, respectively. Now, the yields are even lower at 2.52% and 2.31%. In less than six months, the 10-year yield fell 72 bps and the 5-year yield fell 78 bps.

You can also see the rate declines in brokered CDs. On November 6, 2018, the top 5-year brokered CD rate at both Vanguard and Fidelity was 3.55%. Last week, the top 5-year brokered CD rate was 2.75%. That’s a fall of 80 bps. That decline is actually very similar to the 5-year Treasury yield decline.

Top direct CD rates have not fallen as much, but they have fallen. On November 6, 2018, the top 5-year CD APYs were 4.00% for credit unions and 3.50% for banks. Last week, the top APY was 3.40% for both credit unions and banks.

Direct CD rate changes tend to lag brokered CD rates. So it’s likely we will continue to see direct CD rates slowly fall even as the Fed holds rates steady. If economic conditions worsen, larger and more widespread CD rate declines should be expected.

Deposit Account Strategies

Since we are likely at or near the rate cycle peak, I think it makes sense to look at long-term CDs. Many savers avoided these in 2018 as rates were rising. It’s no longer the time to avoid them. If you had suspended your CD ladders by not re-investing maturing CDs into new long-term CDs, it’s time to continue with your CD ladders by investing those funds back in long-term CDs.

There is still a slight chance that we are not close to the peak of this rate cycle. If you have any worry about being locked into a 5-year CD, make sure the 5-year CDs have early withdrawal penalties (EWP) of no more than six months’ interest. In addition to reducing the risk of being locked into a CD as rates rise, it also gives you more flexibility to be able to use those funds for some other purpose that may arise in the future.

I’ve plugged in some top 5-year CDs into our CD Early Withdrawal Penalty Calculator so you can see how current competitive 5-year CDs compare to competitive 1-year CDs when the 5-year CDs are closed early. Today’s top nationally-available 1-year CD is currently 3.00% APY at CD Bank. The top 5-year CD rate is currently 3.40% APY at University FCU. If that 5-year CD is closed early after one year, the effective yield due to the 90-day EWP is 2.55%. Ally Bank’s 5-year CD rate is currently 3.00% APY. If Ally’s 5-year CD is closed after one year, the effective yield due to the 5-month EWP is 1.75%.

Please note that some institutions have language in their disclosures that give the institution the right to disallow a request by a customer to make an early withdrawal of principal. In other words, there’s no guarantee that an early withdrawal of principal will be possible for some banks and credit unions. Also, there have been cases when credit unions have increased the early withdrawal penalties on existing CDs. Caveat emptor.

If you have CDs that won’t be maturing until later this year or next year, consider add-on CDs with long terms. Open the add-on CD now and you will lock in today’s CD rate until the CD matures. If rates fall by the time your current CDs mature, you can fall back on that add-on CD by making additional deposits into the add-on CD. Those additional funds will then begin earning that same CD rate that was set when the add-on CD was opened.

One of the top 5-year CDs that are included in the above CD EWP Calculator allows add-on deposits. It’s the 5-year CD special at GTE Financial Credit Union. The Jumbo special earns 3.30% APY. This requires a $100k minimum deposit. The regular special earns 3.04% APY, and it requires only a $500 minimum deposit. Please refer to my review of these CD specials for more details. Please note that these specials may not last much longer.

The new internet bank, Rising Bank, offers two add-on CDs. These are called Rising CDs, and they have terms of 18 months and 3 years. For add-on CDs, the longer term ones are best for hedging bets on interest rates. The 3-year Rising CD currently earns 2.90% APY (10 bps lower since March 20). Unfortunately, it has a high minimum deposit requirement of $25k. There’s a maximum balance of $500k, which is an important limitation to note. Another important limitation is that you are allowed to make no more than two additional deposits during the term of the 3-year Rising CD, and each deposit must be a minimum of $5k.

The 3-year Rising CD also provides two options to increase the rate if the 3-year Rising CD rate should happen to rise. I don’t consider that an important feature. It’s not clear in the CD disclosure, but I’ve been told by a Rising Bank official that this rising rate feature is completely independent from the add-on feature. In other words, you can exercise the add-on feature without the interest-rate feature. So if the CD rate falls, you don’t have to worry about your CD rate falling when you make the add-on deposit.

Deposit Account Strategy Summary

It’s now time to seriously consider long-term CDs for your safe money. Choosing 5-year CDs with early withdrawal penalties of no more than 6 months of interest can help reduce the risk of being locked in if rates should happen to rise in the future. Also, add-on CDs can help deal with the possibility of falling rates. If rates do fall, you can always add more to the add-on CD.


Comments
gregk
gregk   |     |   Comment #1
Are GTE Financial's promo CD's (with unlimited add-on allowances) still in effect? Their website consistently indicated this offer was good only through April 30th. In any case, if you're outside of Florida and wish to join this CU be prepared to have blood drawn.
deplorable 1
deplorable 1   |     |   Comment #4
I have a 5 year add-on with them that I opened earlier. It looks like the same terms apply from the website. Just to be 100% sure I would give them a quick call just to double check.
AnnO
AnnO   |     |   Comment #13
"if you're outside of Florida and wish to join this CU be prepared to have blood drawn."

What was the issue?
Ken Tumin
Ken Tumin   |     |   Comment #2
They are still listing these CDs on their website. They did change the promo page without mention of that cruise promotion, but these add-on CDs appear to be the same.
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deplorable 1
deplorable 1   |     |   Comment #5
I'm going to double down on my rate hike prediction of one hike by Dec. 2019 or Jan. 2020. I feel that the economy is doing very well and this will lead to a inflationary spike eventually. Surprisingly, It looks like I'm not totally alone in this belief either.
https://finance.yahoo.com/news/why-the-fed-could-surprise-and-raise-rates-this-year-124533426.html
Paul Ron
Paul Ron   |     |   Comment #6
Does this mean you / Larry have abandoned your five handle prediction?

Thanks for the insight!
deplorable 1
deplorable 1   |     |   Comment #7
I can't speak for Larry but I never said that I thought FED rates were going to hit 5% only that we would see some 5% long term CD specials. I predicted the FED rate to be 3% before a pause. I still think we will see FED rates of 3% before we see a rate cut. It just looks like it will be dragged out a bit longer. I thought we would get there before election season. If Trump wins in 2020 I would expect to see some good 5% CD specials again due to a prolonged good economy.
Paul Ron
Paul Ron   |     |   Comment #8
You can speak for Larry, brother.
gregk
gregk   |     |   Comment #11
Hmmm....., you're beloved President is insisting on an immediate 1% Federal Funds rate CUT and the return of quantitative easing ;
( just as he campaigned for preceding the election, hehe).
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Brokered
Brokered   |     |   Comment #14
#11
He won't get the rate reduction and, once again, people will be proven wrong that Trump has some magical control over monetary policy. He is advocating for lower rates to stimulate growth; it's the opposite of the voices here clamoring for higher rates to improve their interest bottom line at the expense of every borrower. It's nothing more than an economic policy debate.

Let's hope the economy chugs along until the election and the FED remains prudent. If the dems win based on a slowdown, lookout below. Taxes will rise, deficits will skyrocket and the manufacturing base will stall. Savings is one cash pot they will go after with a vengeance. Remember, you didn't build that pot.
Nothing
Nothing   |     |   Comment #15
We are quite aware of political ramifications and able to do an analysis ourselves. But where is your financial plan given your forecast ...it is?
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max100
max100   |     |   Comment #10
if you want to know where the rate heading look to EUROPE JAPAN GERMANY all they have low rate and they will still low for long time so the US cant raise there rate .
Jean Val Jean
Jean Val Jean   |     |   Comment #16
I'm new to this site and to investing with cd's What is reasoning behind getting 5 year cd's because we are the peak of this rate cycle? Do you anticipate rates to be lower than the current rates for 5 years? Couldn't the economic circumstances cause rates to go up in 2 years or 3 years? I understand the advice to get the 5 year cd's with early withdrawal penalties of no more than 6 months of interest, 5 years just seems like a long time.
QED
QED   |     |   Comment #17
Only a few months ago there was some concern about the direction of the American economy. The stock market was down. Interest rate increases faltered and rates flattened a bit.  Some fell.   Even now you will find reports of American financial institutions cutting their interest rates slightly.

However, the Fed met this week and did not cut. Then today the employment report for April came in quite strong. Generally, when people can find work it is supportive for the economy. The stock market also rallied on today's news. Even people of color and Americans less well off are finding work . . . . and paying taxes. If this trend sustains itself I do not think interest rates will continue to fall; actually just the opposite.

There are negatives. The American economy is leading the world today, which makes us the envy of other nations. A strong American economy, again if and only if sustained, is problematic for some persons, both domestic and foreign, who seek a change in America's leadership. There are a great many such persons, here and abroad, who would not mind too much if we fell off our high perch. And such a fall would lead to lower interest rates across the board.

So you see there are countervailing forces operating right now, some of which would lead to higher interest rates and others which mitigate in favor of lower interest rates. In such an environment as this, five years is a REALLY long time!
dollarsncents
dollarsncents   |     |   Comment #19
You appear to be one of the few here that looks at the broader picture with eyes wide open rather than focusing on self interest alone.

Although I think five years is REALLY a short time frame but could be very chaotic.
Someone
Someone   |     |   Comment #26
America has more debtors than savers.
How do high interest rates serve their interests? And of course federal state and local governments have enormous outstanding debts as well. I understand this is a site for savers, and that's probably why I've never seen this point mentioned (I'm sure it has been, although I haven't seen it in the time I've been here}. But it is perhaps the most important point when it comes to the discussion of interest rates.

I'm not advocating for lower rates, simply reminding of the other side of the coin.
Milty
Milty   |     |   Comment #28
We've had historically low savings rates now for at least a decade. Perhaps if there had been more incentive to save (how did saving for tomorrow become either a bad or foolish aspiration?) we would not have so many debtors (or amateur stock traders).
dollarsncents
dollarsncents   |     |   Comment #29
Staying debt free was always enough incentive to save. That's what I was taught at a very young age. Save for tomorrow rather than spend what you don't have today. Common sense goes a long way to a person's financial well being.
Jean
Jean   |     |   Comment #30
Has anyone else been buying the no-penalty CDs? I sure like them. Kind of a hybrid savings account. 2.50% for 13 months. I've been getting one every 2 or 3 months, trying to extend them as long as possible before any possible rate deduction. A great simple & liquid savings vehicle.
Nothing
Nothing   |     |   Comment #31
Milt... those in for long haul and not “rich” rely upon savings to a lesser degree. The dye was cast 10 years ago and there is NO excuse to not plan for low rates as the norm. And after seen several businesses have good non-default loans being called by lenders (due to capital requirements) there are few safe harbors especially with a RE president mindset.
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