December Rate Hike Odds Rise after Fed Meeting - Strategy for Savers


December Rate Hike Odds Rise after Fed Meeting - Strategy for Savers

There were no surprises that came from today’s FOMC meeting. The Fed decided to hold off again on a rate hike. It also announced that they “will initiate the balance sheet normalization program” in October. Both the FOMC statement and the Fed’s projections suggest a December rate hike is still likely.

Increased Odds for a December Fed Rate Hike

One reason the Fed may decide against a December rate hike is if inflation numbers are too low. Today’s statement doesn’t indicate that the Fed has any additional concerns about inflation. It did mention that the “hurricanes will likely boost inflation temporarily.” However, the Fed continues to expect inflation “to stabilize around the Committee's 2 percent objective over the medium term.”

The Fed’s projections did lower the 2017 inflation expectations slightly, but there were no changes in the 2018 expectations. So that shouldn’t change the December rate hike decision. New GDP projections were increased for 2017 and future years. New unemployment projections were slightly reduced in 2018 and 2019. These changes should help the case of a December rate hike.

The most interesting projection for savers is the “dot plot” of the federal funds rate. Out of the 16 FOMC participants, 12 anticipate a rate hike. Only four anticipate no change. That suggests that most on the Fed are ready for a December rate hike if the economy can avoid any major issues.

The odds of a December rate hike did go up today based on the Fed Fund futures as shown by the CME Group FedWatch Tool. The odds increased from 63.3% to 72.8%.

One disappointing issue is that the Fed continues to lower the projected longer run federal funds rate. The dot plot indicates a median longer run federal funds rate of 2.75%. That’s down from 3.00% that was projected in June. Fed Chair Janet Yellen mentioned this in her press conference. She noted that there’s general recognition over the last few years that the neutral interest rate has come down. This means it’s very unlikely that we’ll see interest rates close to where they were back in 2006. The federal funds rate may not exceed 3% for the next five years.

Balance Sheet Reduction and CD Rates

The Fed’s announcement that it will start the balance sheet reduction program in October was expected. This should put upward pressure on longer-term rates. The balance sheet reduction reverses the quantitative easing (QE) that took place during the zero-interest rate years. An important reason that the Fed implemented QE was to suppress longer-term interest rates. Thus, reversing QE should have the opposite effect and push up longer-term interest rates.

As I mentioned in the weekly summary, we probably won’t see any large impact on longer-term rates, including long-term CD rates. The balance sheet reduction has been expected for much of this year, and long-dated Treasury yields have actually fallen this year.

It’s possible that the balance sheet reduction will help CD rates to some extent. What happened in 2013 shows how QE changes can affect longer-term rates. That was the year that the Fed began to taper QE. When tapering was first mentioned, the markets panicked in a reaction that was known as the Taper Tantrum. The result was that long-dated Treasury yields increased significantly. For example, the day before Fed Chair Ben Bernanke mentioned tapering in May, the 10-year yield was 1.94%. Tapering was officially announced at the December 18th Fed meeting. By December 26, the 10-year yield had reached 3.00%.

The rise of Treasury yields during the Taper Tantrum of 2013 did seem to have an impact on CD rates. December 2013 was when PenFed came out with 5- and 7-year CDs with a 3.04% APY. It should be noted that PenFed’s rates were the exception. Nevertheless, 5-year CD rates overall did rise in 2013. Looking at just internet banks, the highest 5-year CD rate in May 3, 2013 was 1.85% APY. On December 20, 2013, the highest 5-year CD rate for internet banks was 2.16% APY.

Deposit Account Strategies

I think we are all waiting for the return of the 3% CDs. We’re slowly moving that way. Unfortunately, this movement has been very slow. For example, the highest 5-year CD rate that’s nationally available from a credit union is 2.60% APY. The highest from an internet bank is 2.40% APY. The top 5-year brokered CD rate last week was 2.35%. At the start of 2017, the highest 5-year credit union rate was 2.60% APY, the highest 5-year internet bank rate was 2.28% APY and the highest 5-year brokered CD rate was 2.30%. As you can see, the rise has been very small and gradual.

Based on this history, I’m hesitant to say that 3% 5-year CDs are right around the corner. The balance sheet reduction program may help a little. Also, if the economy performs as the Fed expects and we see a Fed rate hike in December and three rate hikes in 2018, it seems very likely that long-term rates will have to eventually move up. Consequently, it still seems reasonable to expect that we’ll see several 3% 5-year CDs in 2018. Thus, you may want a strategy of parking your money in top internet savings accounts like Dollar Savings Direct or in a No Penalty CD like Ally’s 11-month No Penalty CD. When we finally see those 3% 5-year CDs, you can then jump on them.

The above strategy has risks. We have been disappointed many times in the past with the hopes of rate hikes. We may not see 3% 5-year CDs in the next year or two. If you want to keep things simple, stick with a standard CD ladder with 5-year CDs maturing at regular intervals. If you’re worried about missing future hot CD deals, choose 5-year CDs with early withdrawal penalties that are no higher than six months of interest. This will allow you to break the CDs without too much cost and redeploy the funds into those higher-rate CDs. You can use our 5-year CD rate table and our CD Early Withdrawal Penalty Calculator to review these 5-year CDs.

For more strategy discussion, please see my article from January, Deposit Account Strategies for 2017.

Future FOMC Meetings

The next three FOMC meetings are scheduled for October/November 31-1, December 12-13 and January 30-31, 2018. The December meeting will include the summary of economic projections and a press conference by Fed Chair Yellen.

payitforward   |     |   Comment #1
Much appreciation for the updates and your perspective.
irrational   |     |   Comment #9
WHEN WAS THE LAST TIME YOU HEARD A FED HEAD OR ANY OF THE USUAL TALKING HEADS ON THE BIZ NEWS CHANNELS OR BLOGS OR WHATEVER,,,,,,,MENTION THE STOCK MARKET BEING ,,,,,,,,,,IRRATIONALLY EXUBERANT,,,,,,SINCE 2010 AT LEAST,,,,,,greenspan raised rates ,,,what about bermonkey and yellenski and all the others ,,,i guess this time it's different.
ANDY JACKSON FAN   |     |   Comment #11
#28 - This comment has been removed for violating our comment policy.
!!!   |     |   Comment #33
Are you doing drugs again? Or haven't you ever stopped?
Bozo   |     |   Comment #2
I bit the bullet and bought the MS 11 month 1.9% on exactly this strategy. Although I was ready to throw in the towel, my wife (the "boss") convinced me to take a deep breath, wait until August of 2018, then go shopping. Wise lady. We will let it ride until next year.
Jake   |     |   Comment #6
Bozo, excuse my ignorance but what is the MS 11 month 1.9% cd?
JBB   |     |   Comment #8
Att   |     |   Comment #12
Maybe Morgan Stanley.
Kaight   |     |   Comment #18
Jake, you are not the ignorant one.  Far from it.  Consider:

MS oftentimes means "Microsoft". But that makes no sense here. "Multiple sclerosis" also makes no sense. Elites use ambiguous and confusing abbreviations purposefully to exclude others with the intent of making them feel inferior and stupid, to demonstrate their superiority, and to signal they are so busy being more successful than average folks that they have no time to write openly and plainly.


BTW, Jake, I do see the suggestion MS might signify "Morgan Stanley".  And Ken does list a Morgan Stanley Bank.  It is located in Salt Lake City.  I suppose that could be it, but who really knows to which bank or credit union MS refers?  It is anyone's guess at this point.
Jake   |     |   Comment #29
Kaight, I appreciate your reply but, to be clear, my question was not meant as a slight toward Bozo or anyone else. He's one of the best posters on this forum. Thanks.
Bozo   |     |   Comment #38
Jake (re comment #29), humor is often the best way to convey a message. Kaight has a sense of humor. I hope I do as well.
Bozo   |     |   Comment #37
Kaight (re comment #18), too funny. Point scored, advantage out. Of course I should have said MorganStanley, and it was pure sloth not to have done so. As I am retired, I have no excuse. I am hardly in a rush these days. That said, what does "Estimated Time of Arrival" (ETA) have to do with anything?

We all tend to insert ambiguities into our posts.

Couldn't resist.

In tennis parlance, it's now "love score". Your serve.
john   |     |   Comment #3
all seniors who saved for their retirement based on the norm 5 % rate have been destroyed
EatPlantsSave$$$   |     |   Comment #4
Downsize, and eat vegan.
Zemo999   |     |   Comment #10
Downsize, and eat your dog.
Happy Times
Happy Times   |     |   Comment #13
All seniors who based retirement on 5% interest were foolish. Interest should never make or break a retirement. Let's review some of the "demands" made in today's world.
Free college education
Forgiveness of college loans
Free phone service
Free health care
Tax subsidies and credits for child care, elder care, solar, windmill, insulation, refrigerator, air conditioners, etc. etc.
Farm subsidies (don't plant here's some cash for you)
Corn subsidies via crappy gasoline requirements
Free education for illegal aliens (legal definition)
Free healthcare for illegals
Free housing
Free food
And the list goes on.
What's missing is a demand for FREEdom from the tyranny of government.

Someone has to pay for all the free stuff and, in today's world, that requires wealth confiscation and transfer from the productive class to the unproductive class. It's that simple. Social programs are designed to maintain enough order so those with pitchforks stay at home, in front of the tube.

No one was owed a 5% CD in retirement. To believe otherwise is nonsense.
Kaight   |     |   Comment #19

Thanks. Your post is spot on. I would also observe you obviously do not live in California SSR. If I'm wrong, get out now while you are able.
deplorable 1
deplorable 1   |     |   Comment #20
@Happy Times: I agree with everything you have there except for your premise that planning on 5% interest was foolish. 5% interest was the normal average rate of return in ALL years pre Obama. Yes they do fluctuate I have earned from 3-10% APY over the years but averaged 5%. When the government/FED/Obama intentionally keep interest rates low for a decade shafting all of us responsible planners, savers, workers and homeowners I don't get how you can blame US for bad planning. I still have some 5% savings accounts that are capped even now and with monthly paying dividend stocks and 2-3% CD's I am still averaging 5% overall. Now how is that bad planning? It is the GOVERNMENT that has a debt and planning problem! Creating programs they can't afford like Obamacare, medicare/medicaid, Social Security, Welfare, bridge cards, free cell phones with free monthly minutes and the endless parade goes on and on while we are 20 trillion in the hole(the real reason for low interest rates). Those of us who plan for our own future are not foolish and I don't think any of us could have forecast 0% interest rates for a least my crystal ball didn't see that one coming.
deplorable 1
deplorable 1   |     |   Comment #22
In regards to planning for retirement: Depending on your income you can only plan ahead and save so much. Say for example you earn $50,000/yr. it may be possible with a 5% APY in the bank, some good investments and a little luck to get to a million. Now a million @5% = $50,000 a year in retirement income which replaces 100% of former salary plus Social security and/or pension. Not bad. Now drop that rate to 1%(like what just happened) and that same million only earns $10,000 a year. Now you will be broke and poor trying to live off of that income even though you are technically a millionaire unless you want to be dipping into your nest egg to survive. Now please tell me how this person in this example was supposed to have planned to save 5 million on $50,000/yr.? You see my point right? This guy didn't do anything wrong yet is getting the shaft just because the government couldn't stay out of the mortgage and debt business. So now this guy is working forever to supplement his income in retirement even though he did everything right by planning and saving. Or he could spend down his million and outlive his savings and need to be rescued by the government in his old age. No amount of planning would have avoided this scenario. There are many many people in this boat and all because of low interest rates. This guy wasn't looking for a handout just a reasonable return on his income.
Bill   |     |   Comment #24
Great post, deplorable 1, you absolutely nailed it!
Happy Times
Happy Times   |     |   Comment #26
Not quite. Try the Vanguard retirement calculator with a million bucks for 30 years. You can generate about 30K/year with inflation adjustments. I've done similar calculations for years and it's surprising how a properly managed 1M can retirement. Oh, and they're aren't many with a million in the bank to begin with. Your assumptions, calculations and conclusions are mostly erroneous.
???   |     |   Comment #27
2016 Interest only income I had from 1 million in CDs gave me 44,500$
No I will not show my taxes .
deplorable 1
deplorable 1   |     |   Comment #31
Well that's a nice trick earning 4.5% while CD rates were 2% max.
deplorable 1
deplorable 1   |     |   Comment #32
@Happy Times: Well I was able to save a million with a small income and compound interest working for me. It's even worse if you had less! Retirement calculators make assumptions like your investments will generate a certain percentage return. like 2008? How did your investments do that year? How many years did it take just to get back to even? I used these calculators decades ago using what was a very conservative 5% return at the time. According to those calculations I should have had over 2 million by now. Hey they were only off by a million. You used to be able to count on a 5% return in a FDIC insured bank account. Using the rule of 72/5 you would have been able to double your money every 14.4 years. Now @ 1% it would take you 72 years to double your money. Even @ 2% it takes 36 years. That really puts low interest rates in the proper perspective when trying to save for retirement. If you are just starting out now with low wages, high taxes, low interest rates, high mandatory healthcare costs all I can say is good luck as you are going to need it.
Bozo   |     |   Comment #39
Deplorable 1, I don't think saving for retirement means plopping all your eggs in one basket. Folks in their early years should probably tilt to equities, with a modest amount in bond funds. Folks in their 50's might consider building a CD ladder (as we did). Dial back on equities. Folks in their 60's, keep a modicum of equities, but think "age in bonds" (CDs count). It's all about what helps you sleep well at night (SWAN). Folks of any age should invest, invest, invest (preferably in tax-deferred accounts). Heck, my wife is still working at age 70, and has a catch-up 401K contrib of $2K/mo. Please, no snide comments about my wife still working while I am retired. She loves her job, they love her, and she can work from her dining room or while baby-sitting the grandkids. Not a bad gig.
Happy Times
Happy Times   |     |   Comment #14
Anyone who planned on 5% in retirement was foolish. Interest on savings should be gravy, not meat.
deplorable 1
deplorable 1   |     |   Comment #23
Mr. Happy Times blames you for not being rich enough to live off of 1%. How dare you have less than 5 million laying around. You must be some kind of lazy bum or something.
AL WALL STREETS PAL   |     |   Comment #25
al greenspan began to ACCOMODATE THE MARKET BEGINNING IN JAN 01,,,,just ask him,,,, geo w.the bushees love low rates,,,,read kevin phillips,,,BUSH DYNASTY and his other bush books........THE COMMIES LOVE WALL STREET AND THE FED IS THE WALL STREET ****....what has happened since jan 01 is not a free market accident IT IS A RIGGED MARKET TO KILL OFF THE HUMBLE MIDDLE CLASS NEST EGGS JUST AS WALL STREET CASHED OUT OUR INDUSTRIAL AND MANUFACTURING FOUNDATION AND BASE DURING SENILE WALL STREET STOOGE REAGAN'S SLEEP WALK PRESIDENCY. the commies cashed out GREAT BRITAINS INDUSTRIAL AND MANUFACTURING BASE IN THE 1950'S which gave rise to the zombie generation in england.
!!!   |     |   Comment #34
Not really. Just lowered our expectations and tightened our belts a little.
RJM   |     |   Comment #5
I bought a few aftermarket CDs via Fidelity yesterday. A couple in my IRA and a couple in my regular account.
I got a somewhat better effective yield than their new issues even after their $1 per $1000 fee.
But, they are not as good as some of the deals available if I were inclined to continue rate chasing like I used to. There is some benefit to me to having fewer accounts. Easier at tax time too.

And I'm over the limit at Ally which Id like to get down to the FDIC limit.

LMCU and Penfed are not really competitive anymore but I still have CDs with them. I will probably be pulling monies from both unless they get competitive soon. As the CDs expire.

Still have a 5% one at Penfed which looks pretty smart right now.

Although, I still think I have way too much dry powder for my age.

Need to put more to work in the market but finding things to buy is difficult.
I added to SO in recent months at favorable prices. And I bought an Emerging Markets Index Fund for the first time. FPMAX. I plan to add to it monthly.

I'm well positioned with lots of dry powder if we have a big US market correction.
Bozo   |     |   Comment #15
RJM, the problem with market-timing (your last sentence in comment #5) is you have to be right "twice". First, when you decide to sit on cash (or sell existing positions), and, second, when you decide to buy back in. It is ever so much easier to just let the market do what it's gonna do, then re-balance when you hit a band. Keep enough in bond funds to do so. It is ever so hard to re-balance from CDs. For folks familiar with Vanguard funds, you need only two holdings to re-balance: VTSAX and VBTLX. Both are extremely low-cost
Bozo   |     |   Comment #17
Further to my comment # 15, fixed-income investing is not an "either/or" proposition. While I am not a huge fan of bond funds in a rising-rate environment, they do have a function in a re-balancing situation. When you hit a "band" (say 5% from your preferred asset allocation) and want to shift money from fixed-income to equities, bond funds are a quick and simple way to do so. CDs are not. So, if stocks correct, and you want to take advantage of a "buying opportunity", the best way to do so would probably be with a bond fund. But, obviously, you need money in the bond fund to do so, and in an adequate amount.

Folks who are planning for a repeat of 2008 - 2009 would probably want a minimum of 20% of their non-CD portfolio in a bond fund. Conservative investors, perhaps 40%. Retirees, perhaps 60%. The trick is to have enough "dry powder" (as you say) to take advantage of market opportunities, while not draining the well.
THIMK   |     |   Comment #7
LET'S NOT OVER THIMK IT, BOYS AND GIRLS,,,,,,,,,,gas prices dip at holidays,,,,and the FED HAS PRODUCED 2 RATE HIKES IN DECEMBER,,,spend the good fortune.
!!!   |     |   Comment #35
No, save for the future if you want a comfortable retirement.
Mario   |     |   Comment #16
Here is an interesting chart, from which we may approximate how rates will play out:

It is a plot of the fed funds rate, 2 year, 5 year, and 10 year rate over time. Notice the similarity of how rates are developing compared to the last tightening cycle (2004-2006); except that they are lower this time around. At the beginning of the tightening cycle, these rates had a large spread and then all converged together (a flat yield curve), which historically has happened in the months or year or so before the next recession.

With the current tightening cycle, it looks like all the rates are currently trending to converge at around 2% in about a year, with a flat yield curve at that time. Of course, the trend can change ... (I hope it will!).
jennifer   |     |   Comment #21
Strategy is an awfully big word! But I simply adore it.
!!!   |     |   Comment #36
Is there anything you don't "adore"?
LAME-O'S & PENGUINS   |     |   Comment #30
DAVID FABER, CNBC'S BEST BRAIN,,,,,used to do LAME-O'S AND PENGUINS, with mark haynes and joe kernan,,,,,,,i would revisit that HOPELESSLY REPUGNANT, VILE STOMACH CHURNING AND HURLING CHANNEL if he got back to his former schtick. watching greasy new york money grubbers kvetch over the fed raising rates and the end of the world resultant makes me flatulate.
Fed Holds Rates Steady - Will Deposit Rate Increases Continue?

The Fed decided to hold off on a rate hike at its fifth FOMC meeting of the year. This was widely expected. Before the meeting, most believed the Fed would keep to its rate forecast with one more rate hike this year. A rate hike at the Fed’s December meeting is thought to be the most likely time. Today’s policy statement didn’t include anything to change these expectations. There had been concerns that the Fed may change its language to acknowledge weaker inflation which could reduce the chance of...

Continue Reading
Third Fed Rate Hike in Six Months - What To Expect from Deposit Rates

The Fed moved as expected by raising the federal funds rate by 25 basis points. This is the third Fed rate hike in the last six months. It is also the first time since 2006 that the Fed has hiked rates more than once in a calendar year. Here’s that all important paragraph in today’s FOMC statement:

The other thing to note in the statement is the Fed’s view of inflation. The statement did acknowledge the recent declines in inflation, but the Fed doesn’t think this has...

Continue Reading
Fed Holds Rates Steady - Deposit Strategies as Rates Gradually Rise

The Fed decided to hold off on a rate hike at its third FOMC meeting of the year. This was widely expected since the Fed increased rates at the last meeting, and there have been no upside economic surprises to speed up the Fed’s gradual rate-hike plans. There had been new concerns that recent weak economic news may move the Fed back to its position last year when it kept putting off rate hikes. The Fed dampened those concerns in today’s policy statement when it described the slowing of...

Continue Reading
Another Fed Rate Hike - What Savers Should Expect in 2017

At the second FOMC meeting of the year, the Fed raised the federal funds rate by 25 basis points. The move had been widely expected since March 3rd when Fed Chair Janet Yellen gave a speech with strong signals pointing to a rate hike at this meeting. Here’s that all important paragraph in today’s FOMC statement:

The Fed kept its note regarding its expectations for gradual increases in the federal funds rate. However, there was one slight change. They removed the word “only” in the sentence. It now says:

Continue Reading
Fed Holds Rates Steady - Strategies for Savers

The Fed decided to hold off on a rate hike at its first FOMC meeting of the year. This was widely expected since the Fed increased rates at the last meeting. As can be seen in the following excerpt from today’s FOMC statement, the Fed included its typical wording about keeping rates unchanged:

What’s not clear from today’s policy statement is if the Fed is preparing for a March rate hike. There were a few small signs that the Fed may do another rate hike in March. First, the Fed...

Continue Reading

More Past Offers