The Fed decided today to hold rates steady. The target range of the federal funds rate remains at 1.50% to 1.75%. The following is an excerpt of today’s FOMC statement with the all important rate description:
The Committee decided to maintain the target range for the federal funds rate at 1-1/2 to 1-3/4 percent. The Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective.
All of the FOMC voting members voted for today’s policy action. Unlike the last four meetings, no one dissented.
Summary of Economic Projections
In addition to the statement, the Fed released an updated summary of economic projections (SEP). In the first table of this summary, you can see the Fed’s economic projections for future years and how they compare to the Fed’s September projections. There were no changes in the GDP projections. For the unemployment rate, there were slight reductions in future rates. For PCE inflation, the only change was the projected 2019 core PCE inflation. In September, core PCE inflation for the end of 2019 was projected to be 1.8%. Now it’s projected to be 1.6%. This strengthens the case that it’s not necessary to hike rates.
Fed’s Dot Plot
At the bottom of this first table in the SEP, the forecast most interesting to savers is the projected federal funds rate. The median projected federal funds rate for 2020 shows no change. Further details of this can be seen in the dot plot at the bottom of the SEP. Out of the 17 FOMC participants, 13 of them are projecting no change in the federal funds rate in 2020. The other 4 are projecting a 25-bp rate hike. More participants project higher rates in 2021 and 2022. No one is projecting a rate cut in future years. For 2022, only one participant is projecting a rate that will remain at its current level. All other participants are projecting rates that are higher from its current level by a range of 25 to 125 bps.
The good news from the dot plot is that no one on the Fed thinks there will be rate cuts in the next three years. Many on the Fed think there will be rate hikes in the next three years. Based on the dot plot history, I wouldn’t take the dot plot too seriously. For example, the dot plot from December 2018 showed that no one on the Fed projected rate cuts in 2019.
At the press conference today, many questions came up about inflation and its impact on rate decisions. This gave Fed Chair Jerome Powell the opportunity to reiterate his view about what he’ll need to see in inflation before deciding to raise rates. With an answer that was very similar to one in October, he said that it’s his view that it would take a “significant move up in inflation that’s also persistent before raising rates to address inflation concerns.” This supports the low odds of a rate hike in 2020.
Based on the SEP and the inflation projections, it would appear the odds of a rate hike will also be low for 2021 and 2022. One reporter asked about this inconsistency of the dot plot suggesting rate hikes in 2021 and 2022 while the inflation projections show inflation rates never exceeding 2.0% in those years. Here’s an excerpt of Fed Chair Jerome Powell’s answer of this question:
None of us have much of a sense of what the economy will be like in 2021. So I think what may be behind some of that is just the thought that over time it would be appropriate if you believe that the neutral rate is 2.5%, it would be appropriate for your rates to move up in that direction.
This is another example of why we should be skeptical of the dot plot.
Future FOMC Meetings
The next three FOMC meetings are scheduled for January 28-29, March 17-18, and April 28-29. The March meetings will include the summary of economic projections. All meetings now include a press conference by the Fed Chair.
What Savers Should Expect in 2020
Based on Fed Chair Jerome Powell’s comments about inflation, we may be starting a long period in which the Fed holds rates steady. Based on the recent history of inflation, it’s doubtful things will change anytime soon to meet the Fed Chair’s informal criteria for rate hikes.
Online Savings Account Rates
Online savings account rates have remained near the target range of the federal funds rate. As the federal funds rate has moved down, online savings account rates have generally followed with some lag. The good news for savers is that the online savings account rates have generally not fallen as much as the federal funds rate. Here are a few examples from the popular online banks. All percentages are APYs, which are accurate as of 6:00pm 12/11/2019:
- American Express High Yield Savings: Peaked @ 2.10%, Now @ 1.75% (-35 bps)
- Synchrony High Yield Savings: Peaked @ 2.25%, Now @ 1.80% (-45 bps)
- Goldman Sachs Bank Online Savings: Peaked @ 2.25%, Now @ 1.70% (-55 bps)
- Ally Online Savings: Peaked @ 2.20%, Now @ 1.70% (-50 bps)
- PurePoint Financial Online Savings: Peaked @ 2.35%, Now @ 1.80% (-55 bps)
I think we may see a few more online savings account rate cuts in December and January, but rate cuts should now slow down with the Fed holding rates steady. With the target federal funds rate range now at 1.50% to 1.75%, I’m afraid we should expect most online savings account rates to move near this range.
As we have seen in 2019, CD rates can fall even when the Fed is holding rates steady. One thing that tends to lead CD rate changes is changes in Treasury yields, and Treasury yields have been on the decline since November 2018. I’ve listed the yields of the 10-year and 5-year Treasury notes that occurred after the last ten Fed meetings. Most of the declines occurred before the Fed decided to start cutting the federal funds rate. The yields since September appear to be stabilizing.
- Nov 8, 2018: 10yr @ 3.24%, 5yr @ 3.09%
- Dec 19, 2018: 10yr @ 2.77%, 5yr @ 2.62%
- Jan 30, 2019: 10yr @ 2.70%, 5yr @ 2.49%
- Mar 20, 2019: 10yr @ 2.54%, 5yr @ 2.34%
- May 1, 2019: 10yr @ 2.52%, 5yr @ 2.31%
- Jun 19, 2019: 10yr @ 2.03%, 5yr @1.77%
- Jul 31, 2019: 10yr @ 2.02%, 5yr @ 1.84%
- Sep 18, 2019: 10yr @ 1.80%, 5yr @ 1.68%
- Oct 30, 2019: 10yr @ 1.78%, 5yr @ 1.61%
- Dec 11, 2019: 10yr @ 1.79%, 5yr @ 1.64%
Brokered CD rates are the first deposit products that respond to Treasury yield changes. Like the Treasury yields, brokered CD rates have plummeted since November 2018. The top 5-year brokered CD rate was 3.60% in November 2018. As of last week, it’s down to 1.95%. That’s a fall of 165 bps. On the positive side, this is up from the last meeting when the top 5-year brokered CD rate was 1.90%. It’s also up from the September meeting when the top 5-year rate was 1.70%.
Direct CD rates from online banks and credit unions haven’t fallen as much as Treasury yields and brokered CD rates. Here are a few examples of how 5-year CD rates have fallen at five popular online banks. All percentages are APYs, which are accurate as of 6:00pm 12/11/2019:
- American Express 5yr CD: Peaked @ 3.10%, Now @ 2.15% (-95 bps)
- Synchrony 5yr CD: Peaked @ 3.10%, Now @ 2.25% (-85 bps)
- Goldman Sachs Bank 5yr CD: Peaked @ 3.10%, Now @ 2.15% (-95 bps)
- Ally Bank 5yr CD: Peaked @ 3.10%, Now @ 2.15% (-95 bps)
- PurePoint Financial 5yr CD: Peaked @ 3.10%, Now @ 2.05% (-105 bps)
A few of these CD rates are down only slightly from October. That may be a sign that we are at or near a bottom for CD rates.
Deposit Account Strategies
Without the possibility of Fed rate hikes anytime soon, deposit rates will likely be pretty stable in 2020, and it may take multiple years before we see substantially higher rates on savings accounts and CDs. The Fed’s dot plot may be the best case scenario for savers. In that scenario, we see a Fed rate hike of 25 bps in both 2021 and 2022. The economy would probably have to be very strong for such rate hikes. That would put upward pressure on CD rates before the first Fed rate hike. Once the Fed increases rates, online savings account rates would slowly follow.
The other scenario is that there will be an economic slowdown next year. Even if there’s no recession, a slowdown may cause the Fed to cut rates a few more times. Even if it’s not severe enough to cause more Fed rate cuts, it would probably keep inflation muted, and that would cause the Fed to hold rates steady for a long period of time. In any of these pessimistic cases, deposit rates either hold steady or decline.
In this type of rate environment, it seems doubtful that we’ll see any widespread CD rate increases in the next one or two years. Thus, mid-term and long-term CDs make sense now. If you’re optimistic about the economy, choose mid-term CDs. If you’re pessimistic, choose long-term CDs. 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.
Mid-Term and Long-Term CDs with Small Early Withdrawal Penalties
If you are worried about locking money into CDs, look for CDs with early withdrawal penalties (EWP) of no more than six months of interest. The best deals are currently from credit unions that are still offering CDs with yields close to 3% and with EWPs of only six months of interest. Two examples as of 12/11/2019 include Justice FCU (5-year Jumbo CD with a 3.21% APY) and Dover Federal Credit Union (5-year Jumbo CD with a 2.90% APY). Both of these credit unions make it possible for people in any state to join via an association membership. There’s also the 3.00% APY 37-month IRA Certificate Special from Navy Federal Credit Union. Unfortunately, there’s no non-IRA equivalent of this Special.
To see how the EWP affects the yield when you close a CD early, please refer to our CD Early Withdrawal Penalty Calculator.
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.
Add-on CDs haven’t always worked as advertised. There have been a few credit unions that didn’t fully honor the add-on feature of their add-on CDs. GTE Financial almost did this in October, and there remains the possibility it could still do this sometime in the future. If interest rates fall more than expected and the institution didn’t specify a maximum balance level, the risk increases that the institution may renege on its add-on deposit promise.
One add-on deposit 5-year CD that’s nationally available is the 5-year Growth Certificates at Mountain America Credit Union (MACU). Unfortunately, the rate has fallen to 2.40% APY as of 12/11/19. In late 2018, this rate had been as high as 3.51% APY. There’s only a $5 minimum initial deposit. The main downside to this add-on CD is a maximum balance of $100k (in any one or combination of Growth Certificate accounts). MACU allows members to add money to their Growth Certificates at anytime. The account also requires an automated monthly deposit of at least $10. The $100k maximum is a downside, but I think it increases the odds that you’ll be able to add deposits all the way to maturity.
A couple of online banks have add-on CDs, but they’re shorter-term CDs.
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 has a 2.10% APY as of 12/11/2019 (Rate had been 3% in March). 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, especially in our current environment. 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 option without the interest-rate option. So if the CD rate falls, you don’t have to worry about your CD rate falling when you make the add-on deposit.
The online bank Bank5 Connect has been offering a 2-year add-on CD since 2013. The Bank calls it the 24-month Investment CD, and it has a 2.10% APY as of 12/11/2019 (Rate had been 60 bps higher in July.) According to the Bank5 Connect’s account disclosure for the Investment CD, “You may make an unlimited number of deposits into your account.” Minimum deposit is only $500.
With rates likely to fall, the no-penalty CD is a good way to avoid short-term rate reductions while maintaining liquidity. Unlike a regular CD, there’s no early withdrawal penalty. So there’s no lock on your money except for the first six days from account funding.
In the last year, no-penalty CDs have been introduced at a few online banks and credit unions. Below is a list of noteworthy no-penalty CDs with their APYs as of 12/11/2019.
- 2.00% APY 11-month Flex Time Deposit ($100k min) - M.Y. eBanc
- 1.90% APY 11-month Flex Time Deposit ($10k min) - M.Y. eBanc
- 1.90% APY 13-month No-Penalty CD ($10k min) - PurePoint Financial
- 1.90% APY 11-month No Penalty CD ($25k min) - Ally Bank
- 1.90% APY 7-month No-Penalty CD ($500 min) - Goldman Sachs Bank USA
- 1.85% APY 11-month Liquid CD ($5k min) - Citizens Access
- 1.80% APY 11-month No-Penalty CD ($1k min) - CIT Bank
- 1.80% APY 6-month No-Penalty CD ($500 min) - Investors eAccess
- 1.75% APY 14-month No-Penalty CD ($10k min) - PurePoint Financial
- 1.73% APY 11-month No Penalty CD ($5k min) - Colorado Fed Savings Bank
- 1.70% APY 11-month No-Penalty CD ($500 min) - Goldman Sachs Bank USA
- 1.70% APY 11-month No Penalty CD ($5k min) - Ally Bank
- 1.65% APY 13-month No-Penalty CD ($500 min) - Goldman Sachs Bank USA
- 1.65% APY 11-month No Penalty CD (no min) - Ally Bank
- 1.65% APY 11-month No-Penalty CD ($10k min) - PurePoint Financial
When comparing these types of no-penalty CDs, longer terms are an advantage. The only reason to go for a shorter term is if the rate is higher.
Uncertainty of Future Rates
I don’t see much chance that rates will rise in the next year. Fed Chair Jerome Powell has again expressed his view that it would take a “significant move up in inflation that’s also persistent before raising rates.” That appears very unlikely for 2020. Thus, don’t expect online savings account rates to rise in 2020.
It’s possible that we could see some CD rate increases if the economy remains strong. As we saw earlier this year, the state of the economy can drive CD rates even when the Fed is holding rates steady. However, most of the CD rate cuts occurred after it became apparent that the Fed was going to cut rates. CD rate cuts continued as the Fed lowered rates. So until it becomes apparent that the Fed is going to hike rates, we probably won’t see widespread CD rate increases.
It’s important to remember that no one, including me, can predict future interest rates. Last year was a reminder of this when it appeared we might be seeing 4% savings account rates in 2019.