Fed Meeting: Tapering Starts - Deposit Rates and Strategies for Savers

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At the completion of its two-day FOMC meeting, the Fed announced the start of tapering in its FOMC statement. As expected, the pace of tapering will be $15 billion reduction per month, which should end asset purchases by June of next year. The Fed left open the possibility that it might adjust the pace of tapering:

The Committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook.

The only other important change is related to the Fed’s “transitory” inflation language. The Fed is still sticking with transitory, but it added some acknowledgement of uncertainties. It also tried to provide an explanation about why it is still holding on to the transitory view. The exact changes are described below:

From the September FOMC statement:

Inflation is elevated, largely reflecting transitory factors. …

[...]

Progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy, …

From today’s FOMC statement:

Inflation is elevated, largely reflecting factors that are expected to be transitory. Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors.

[...]

Progress on vaccinations and an easing of supply constraints are expected to support continued gains in economic activity and employment as well as a reduction in inflation.

Everything else in today’s FOMC statement was the same as the September statement. The zero rate policy continues unchanged. Like recent meetings, there was no dissent. All eleven voting members of the FOMC voted for the monetary policy action in the statement.

Press Conference

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 more explanation about why they still think that the recent high inflation is transitory. It also included an acknowledgement that inflation is “running well above” their 2% target and that “supply constraints have been larger and longer lasting than anticipated.” Below is a larger excerpt of Fed Chair Powell’s inflation explanation:

The supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors. In particular, bottlenecks and supply chain disruptions are limiting how quickly production can respond to the rebound in demand in the near term. As a result, overall inflation is running well above our 2 percent longer-run goal. Supply constraints have been larger and longer lasting than anticipated. Nonetheless, it remains the case that the drivers of higher inflation have been predominantly connected to the dislocations caused by the pandemic, specifically the effects on supply and demand from the shutdown, the uneven reopening, and the ongoing effects of the virus itself.

The first question from a reporter asked if the Fed would be raising rates in 2022. As you might expect, Fed Chair Powell added little to what was in the Statement and in his opening remarks. However, he did add an important opinion regarding inflation by saying that “certainly we should see inflation moving down by the second or third quarter.” Below is a larger excerpt of Fed Chair Powell’s response:

We don’t think it’s time yet to raise interest rates. There is still ground to cover to reach maximum employment, both in terms of employment and in terms of participation, [...] Our baseline expectation is that supply bottlenecks and shortages will persist well into next year, and elevated inflation as well. And as the pandemic subsides, supply chain bottlenecks will abate and job growth will move back up, and as that happens, inflation will decline from today’s elevated levels. Of course the timing of that is highly uncertain, but certainly we should see inflation moving down by the second or third quarter.

A year from now if inflation is still elevated, I hope a reporter will remind the Fed Chair of this quote. The Fed may be forced to hike rates late next year even if job growth has not reached the desired levels.

Future FOMC Meetings

The remaining 2021 FOMC meeting is scheduled for December 14-15, and that meeting will release the Summary of Economic Projections (SEP) that includes the federal fund rate forecasts of the FOMC participants. The first two FOMC meetings of 2022 will take place on January 25-26 and on March 15-16.

Treasury Yield Changes

In addition to showing how the yields have changed from yesterday to today (after the FOMC meeting), I also included the yields right after the September FOMC meeting (Sep 22nd). The mid- and long-dated yields had the largest increases from yesterday to today, with the 5-, 10- and 30-year yields all rising 4 bps. That suggests that the markets were moderately optimistic about the economy from the Fed meeting.

From the last meeting to today, large yield gains have occurred on maturity durations from one to 30 years. In terms of the number of basis points, the 5-year Treasury yield had the largest gain, rising 33 bps.The yield gains were smaller for both shorter durations and longer durations, with a 9-bp gain on the 1-year yield and a 16-bp gain on the 30-year. This suggests a growing expectation that Fed rate hikes will occur sooner, but the hikes may be due to high inflation rather than strong jobs numbers.

The following yields are from the Treasury website.

  • Sep 22nd (last mtg) → Nov 2nd → Nov 3rd
  • 1-mo: 0.04% → 0.05% → 0.05%
  • 3-mo: 0.03% → 0.05% → 0.05%
  • 6-mo: 0.05% → 0.07% → 0.07%
  • 1-yr: 0.08% → 0.15% → 0.17%
  • 2-yr: 0.25% → 0.46% → 0.47%
  • 5-yr: 0.86% → 1.15% → 1.19%
  • 10y: 1.32% → 1.56% → 1.60%
  • 30y: 1.84% → 1.96% → 2.00%

Future deposit rates

If the Fed starts hiking rates in 2022 and continues hiking in 2023, we may see some online savings account rate hikes in 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 tapering 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 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

A combination of I Bonds, high-yield reward checking accounts, and CDs with mild early withdrawal penalties will likely generate yields much higher than the best online savings accounts.

I Bonds and high-yield reward checking accounts will allow you to earn much higher yields than the yields from today’s online savings accounts. Reward checking offers a high degree of liquidity, but I Bonds lack liquidity for the first year of the purchase. So it’s best not to depend entirely on I Bonds for your savings. There’s also a 3-month interest penalty when I Bonds are redeemed during the first five years, but that’s a small penalty when compared to CDs.

The main issue with both I Bonds and reward checking accounts is balance limitations. After you max out I Bonds and your reward checking accounts, the remaining balance can go into CDs and/or savings/money market accounts. In today’s world, it might seem savings accounts make much more sense than CDs. Unless you think rates will shoot up in 2022, CDs with mild early withdrawal penalties can make more sense.

Series I savings bonds

The Treasury announced the new I Bond rates on Monday. High inflation from March through September has resulted in a record-high I Bond inflation rate of 7.12%. Unfortunately, the I Bond fixed rate remains at 0%, so the composite rate equals the inflation rate. I Bonds that are purchased from this week through April 2022 will earn an annualized yield of 7.12% for six months. The rate for the next six months will depend on inflation from September through March 2022. In mid-April 2022, we’ll be able to calculate the next I Bond inflation rate. Even if inflation falls in the next year, I Bond yields will likely be far higher than the yields of any other conservative savings product.

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 via trust and business accounts.

High-yield reward checking accounts

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 (some 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.

Top long-term CDs with mild early withdrawal penalties

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 2022. So you may not want to give up on CDs. For example, a 49-month CD at 1.60% APY could provide 3x the interest as compared to an online savings account that may average only 0.50% for the next 49 months (see my bi-weekly CD rate summary.)

Even if the Fed starts hiking rates in 2022, I doubt online savings account rates will rise substantially before 2023. A top long-term CD with a 6-month early withdrawal penalty that’s opened today and closed early after one year will likely earn more interest than an online savings account. If rates don’t rise fast, the CD will earn much more than the online savings account.

You can calculate the effective yields when you close CDs early by using our CD EWP Calculator. I’ve pre-populated the CD EWP Calculator with five competitive long-term CDs with EWPs that range from five months’ interest to 12 months’ interest. As you can see, if savings account rates don’t increase over the next year, you’ll earn more with these CDs that have EWPs of five or six months of interest (Please be aware that there are some risks in planning for an early withdrawal of a CD.)

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. If you are concerned with rates rising very fast in the next year, keep more in online savings accounts after you have maxed out your reward checking accounts.

Combination of all of the above

For your safe money (with no risk to principal), a combination of I Bonds, reward checking accounts, online savings accounts and CDs can still make sense.


Comments
jimdog
  |     |   Comment #1
I like the remark "It’s wise to remember that no one can predict future interest rates." Very true, but history would say rates will be much, much higher after this orgy of zero rates.
Choice
  |     |   Comment #2
The market reflects future interest rates all the time! The sooner that …understand that concept the better they “may” be, financially that is.
deplorable_1
  |     |   Comment #3
This is too funny they are still sticking with the "transitory" spiel. It should be pretty obvious by now to everyone except the potus that inflation is out of control. Well what will they say at the next meeting? Like I said before their goal will be to drag out the timeline as long as possible before raising rates in order to keep the stock market afloat. Take away 0% rates and the market drops like a stone.
me1004
  |     |   Comment #4
The Fed is doing too little, too late. They are a bunch of Trump low-rate hawks on the Fed now, they refuse to see the reality of what is happening with inflation, it's going to get out of hand and uncontrollable, like in the 1980s under Reagan. Low-rate hawks never see a reason for higher rates -- so now all they can see is that we had a pandemic, that's their excuse. Biden can't have the majority of appointees on the Fed until his last year in office, so figure 2023 before they start having any significant influence, but even then, we will have to see what kind of peole he appoints. Meanwhile, there is some talk that he will reappoint Powell.

Sure, we will see higher savings rates when they do finally SLOWLY EDGE up the Fed rate, but the rates will not really be that in the face of high inflation, they will probably be less than inflation, leaving us at a loss despite a higher rate number.

They are being unrealistic about what unemployment rate constitutes full employment. That has always varied, depending on who you talk with. For many years, it was considered to be 6% unemployment. It has been down in the 3% range well in the past, but that did not, and could not, last. Trump came in and so pumped the money supply, between low rates and profligate spending, that it dropped to just over 3% -- and then the pandemic hit.

That 3%+ was nice, but it could not last, it was unsustainable, pumped by low rates that have drastically bent the economy out of shape. That impact cannot last, it is a house of cards -- it has already created a generation that looks at saving money as a fools game -- and they are right at the savings rates we have seen for now the past 13 years. The economy is now fully addicted to such low rates, it cannot function at the levels savings rates should be at to give reasonable return to savers. Savings are a very important part of the economy. That cannot turn out well over the longer term, because with little savings, any little bit of downturn in the economy will spin out of control, the no-savings generation will have no buffer for it.

I am gathering that the Fed is insisting that low 3%+ is the mark for full employment, and it is using that house-of-cards scenario as the excuse to not raise the Fed rate. It is putting fantasy over reality.
GreenDream
  |     |   Comment #5
"Low-rate hawks never see a reason for higher rates"

Um, you do realize all the current members of the Fed board except for one were members of the board back in 2018 when the fed funds rate was raised all the way up to 2.5% For people that "never see a reason for higher rates", they had no problem raising the rates back then.

"but the rates will not really be that in the face of high inflation, they will probably be less than inflation"

it's pretty much always been thus. Periods where rates are higher than inflation are the exception, not the norm
me1004
  |     |   Comment #20
Voting members of the Fed are who matters.

And 2.5% is pretty low.
GreenDream
  |     |   Comment #29
"Voting members of the Fed are who matters. "

And the vast majority of them were there the last time rates were on the way up. Again for people that "never see a reason for higher rates", they had no problem raising the rates back then.
Mak
  |     |   Comment #6
1-At $30 trillion debt and a 1.5% 10 year rate the debt payments are somewhere around $300 to $350 billion(not exactly sure on the number).
2- If the fed raises rates too much and causes the stock market to drop companies will start to lay off workers and into a recession we will head....the fed stayed too low for too long and now they've created a mess with no easy way out imo.
milty
  |     |   Comment #9
Seems to me companies lay off when there is less demand for their products and services, but not necessarily just because their stock fell. Obviously not all companies laid off or even suffered much at all during the Great Recession, but as a result of the Fed's actions, it does seem our stock market has become addicted to low rates. By weaning investors off ZIRP, it's a chance to return to normalcy where companies are valued based on their performance, and savers (and perhaps our government) are rewarded for their frugality.
Mak
  |     |   Comment #12
Well milty, I've been watching markets for a long time, we'll see what happens if they ever raise the rates enough to find out, actually if they ever raise rates at all...talk is cheap.
_______
Btw, are we really going to see inflation over time or will we end up back with deflation... anyways on another note, there are some smart people out there think this is setting up for end the fed moment with cryptos taking over for our fiat currency.
Mak
  |     |   Comment #13
While it sounds kind of crazy to me, who knows, not me...;)
FirstNation
  |     |   Comment #30
Smart people and cryptos should never be in the same sentence.
kcfield
  |     |   Comment #7
I wish the Fed would realize that admitting error is a sign of competence. How simple and refreshing it would be for the Fed to say: "We originally thought inflation was transitory and now realize that it is not."
goldismoney
  |     |   Comment #8
more likely they'll say that they were wrong that non-transitory inflation is a problem, 2% was just a guess, maybe 20% is ok
jimdog
  |     |   Comment #10
News Update: Jay Powel's stock portfolio hits all time high. LOL
P_D
  |     |   Comment #11
Fixed income investors including treasury security holders are ****ed either way. In fact the entire economy is ****ed.

You are currently losing the value of your investment through negative returns to inflation.

If rates increase, and the stock market crashes, there will be no one left to pay the taxes that pay for all the growing list of handouts the government gives out or the interest on its debt which includes your government bonds. The dollar (and all investments denominated in dollars) will become worthless as America loses its reserve currency status.

There is only one way to save the economy from certain doom and that is to drastically cut government spending.

The bad news is that the current party in power is vowing to spend more than any other in history ... just the opposite of what is needed to save the economy. This party is intentionally trying to destroy the US economy because tearing down the capitalist economy is the only way to install the socialist/Marxist economy in its place that it desperately wants. So don't expect to win them over with any obvious economic advice about how to avoid economic catastrophe... that is counter to their mission and they will just continue to ignore it. Hell is the impossibility of reason and this party is hell.
milty
  |     |   Comment #14
Good grief, $1.85T spending on non-military related programs over 10 years is causing heartburn, but $12T on military programs over 10 years is A-okay. Spending taxpayer money is socialism regardless of which programs. So, it's really just a matter of priorities when defining the common good.
kcfield
  |     |   Comment #15
PD: I want to challenge your implied premise a bit: Your premise seems to be that degree of one party's deficit spending equates with their degree of culpability and irresponsibility. However, I would argue the following: a) For economic conservatives (you and I are in that category) we expect the non-incumbent party to have a higher degree of fiscal responsibility and restraint; b) While it may be true that the incumbent party evidences a higher degree of deficit spending, it is far more shocking that the non-incumbent party has joined with the incumbent party in ignoring the massive federal debt--or at the very least, putting it on the back burner. Thus there is joint culpability, since both major parties are failing to effectively address this growing debt and to treat it as an "A" priority. The result of their joint culpability is low saving accounts and CD interest rates, high inflation rates, and an unfortunate fiscal outlook going forward. I think your well articulated views would be enhanced (especially given your economic expertise as a Wharton graduate) by addressing the role of the non-incumbent party vis a vis the state of the economy. Remember that within a dysfunctional family--even the one we call the federal government--every person has a role; and scapegoating one person, party, or entity will never suffice.
gregk
  |     |   Comment #17
When have Republicans ever took action to cut aggregate Federal spending as opposed to merely ranting about its excesses, PD? Reagan, Bush (father & son), Trump, - they all hugely increased it,
while all at the same time cutting the taxes that might have financed it. You're no more than a big fake with your rabid partisanship.
P_D
  |     |   Comment #21
Repeat for those who have not absorbed the lesson. In spite of their record tax cuts, there was no increase in inflation during the terms of Presidents Reagan, Bush or Trump.

Repeat, no increase in inflation in spite of tax cuts.

Furthermore, there were record strong economies with the biggest GDP numbers under President Reagan and the lowest unemployment for minorities and women (40 year low for women) ever recorded under President Trump.

And still further, with every tax cut there was MORE tax revenue raised than had been raised before the tax cuts.

This administration is clearly intentionally trying to tank the economy by causing skyrocketing energy prices which raise the cost of EVERYTHING in order to make their outrageously expensive, economy killing, non-existent alternative energy climate change energy sources more palatable, opening the borders to an invasion of illegals (an all time record over 2 million so far in just the past 10 months) to create a welfare class of dependents who are forced to rely on government handouts for their sustenance and imposing authoritarian mandates to throw people out of work and onto welfare dependency.

This is the socialist/Marxist "fundamental transformation" that Obama tried to pull off but couldn't. So now they have a trojan horse puppet in the White House and control of both houses of Congress and are desperate to complete the teardown of the US economy to install their totalitarian government.

Yes, my case is one sided. Because the attempted transformation is one sided. This is not being done by the Republicans or anyone else. It is a socialist/Marxist trasnformation attempt by the Democrats. So why is there a need to try to make "balanced" what is not balanced at all?
gregk
  |     |   Comment #22
"Repeat for those who have not absorbed the lesson... there was no increase in inflation during the terms of Presidents Reagan, Bush or Trump."

Just to start with, PD, the CPI rose an average of 1.9% during each year of the Trump Presidency. The increases for 8 years of the Reagan Presidency were as follows:

1981 - 8.9%
1982 - 3.8%
1983 - 3.8%
1984 - 3.9%
1985 - 3.8%
1986 - 1.1%
1987 - 4.4%
1988 - 4.4%

Would you like me to continue with the Bush (father & son) record?

You'll now proceed to change the argument, of course, when confronted with your habitual inaccuracies.
P_D
  |     |   Comment #23
Sorry #22 but you failed both your math and economic courses yet again.

As I stated there was NO INCREASE in inflation under either President Reagan or President Trump in spite of their tax cuts.

There is a difference between INCREASES in inflation and inflation. Of course there was inflation. But there was NO INCREASE in inflation.

What you posted is the perfect validation of my point. You can clearly see the TREMENDOUS *DECREASE* in inflation during the Reagan presidency in the numbers you posted. From 8.9% a year when he took office to less than half of that when he left.

Thanks for backing me up.
gregk
  |     |   Comment #25
So if Biden serves 8 years as President, PD, you'd be perfectly happy if the average inflation rate mimicked that of the Reagan years, and congratulate him for his performance at the end?
P_D
  |     |   Comment #26
#25
If Biden can cut the rate of inflation by more than half and average 3.5% GDP like President Reagan did I would be thrilled to congratulate him. But there is ZERO chance of that happening if he and the Democrats continue down this destructive path of undoing every policy that is proven to work simply because they don't like the people who successfully used those policies.

I am not interested in experimenting to see where this authoritarian agenda goes because there is more than ample history that already makes that crystal clear. When you do the opposite of that which is proven to advance American freedom, strength and prosperity you achieve the opposite results. And it is clear that is precisely what the Democrats are attempting to do. You cannot have a socialist/Marxist country until the economy is destroyed and people are dependent on government totalitarians for their sustenance. And it cannot be more clear that that is precisely where the Democrat party of 2021 is desperately attempting to go.
Mak
  |     |   Comment #27
That would be called cherry picking but hard to compare the different times like that, high interest rates back during Reagan and Bush and trump really never did anything but talk a lot about himself, looks like Biden got the infrastructure bill through which trump could not...... the debt grew 186% under Reagan..... so under Reagan if the debt had been $27 trillion it would rise to $47 trillion by the end of his terms....but you could get a pretty good CD rate back then...;)
milty
  |     |   Comment #28
"There is a difference between increases in inflation and inflation." Sounds like a used car salesman: sure there was a lot of mileage put on in the first year but only half that thereafter . . . that's just like spinning the odometer backwards, you see the car's practically brand new now.
gregk
  |     |   Comment #24
"The administration is clearly intentionally trying to tank the economy" ... blah, blah, blah.

It's always extraordinary how you are able to transparently read the motivations of each and every individual or group you comment upon, without any doubt or qualification whatsoever. Everything is known to you, but the judgments themselves wild and irrational.
FirstNation
  |     |   Comment #31
And, the Trump tax cuts to the rich didn't affect the deficit?
Republicans never worry about deficits when cutting taxes.
At least the Democrats are raising taxes to cover the cost of their new social programs.
Whether you agree with them or not.
Personally, I don't.
They should be concentrating on helping those truly in need.
Not providing babysitters for middle class folks.
I don't drink the coolaid from either party.
Apparently, you do.
milty
  |     |   Comment #16
Note to the Fed: prices are not stable and unlikely to drop, but the U.S. added 500K+ jobs in October-- start raising rates sooner than expected.
Choice
  |     |   Comment #18
May I suggest our learned posters on effects of deficits, borrowings, inflation, politics, etc. look at the continued “subsidizing” of foreign economies and outsourcing (China comes to mind) with disproportionate currency exchange rates. All of us like the cheap imports and, in effect, building up the Chinese economy/military might…but the question is (with the most recent monthly trade deficit north of $80Billion) why does China et al continue to accept US currency? Not to buy US goods/services…and buy…. And the consequent affect at home?  Where is that trillion dollar bill…CD rates won’t be a problem then!
Mak
  |     |   Comment #19
Interesting, after a 10 year high yield of 1.69% less than 2 weeks ago it has now dropped down to 1.45%... seems to be going the wrong way...;)
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