At the completion of its two-day FOMC meeting, the Fed issued a statement very similar to its January statement. There was just a small change to the economic overview which acknowledged some progress:
indicators of economic activity and employment have turned up recently, although the sectors most adversely affected by the pandemic remain weak.
As expected, there were no policy changes. The target federal funds rate remains near zero and the pace of asset purchases remains unchanged. No one dissented at today’s meeting.
The Fed also released updates to its Summary of Economic Projections (SEP) which includes federal funds rate forecasts that extend out through 2023. On the plus side, the economic forecasts were upgraded from December which indicates more optimism for the economy. On the down side, there was little change to the federal funds rate forecast. It still looks unlikely that the Fed will hike rates through 2023. The only change between December and March was a few additional FOMC participants who anticipate a rate hike in 2022 and 2023. For 2022, there were four participants who anticipated a rate hike. Only one anticipated a rate hike in December. For 2023, there were seven participants who anticipated a rate hike, that’s up from five in December. Even with these higher numbers, the majority of the FOMC participants still anticipate no Fed rate hike through 2023.
Fed Chair Jerome Powell held the typical post-meeting press conference. One take away from the press conference was how the Fed Chair seemed to make the point that it will take substantial progress on employment and inflation before the Fed will even start to consider tapering its asset purchases. Tapering will come before the first rate hike. During the 2008-2015 zero rate period, the Fed started to taper in December 2013, and it didn’t start hiking rates until December 2015.
Strategies for Savers to Maximize Cash Yield
Based on what the Fed continues to say and based on how deposit rates have fallen, I’m afraid we are in for a long period of very low deposit rates. It’s unlikely that deposit rates will receive any help from the Fed through 2023.
The best hope for savers is that a strong economic recovery pushes banks into raising deposit rates. A strong economy will give a boost to loan demand which will force banks to increase their deposits. Also, a strong economy will boost the stock market which encourages investors to move their cash out of banks and into stocks. That will also push banks to raise their deposit rates to increase deposits.
One concern for savers is rising inflation that erodes savings. With the unprecedented fiscal stimulus, this is a risk. Due to the Fed’s new inflation framework, savers may have to live with a year or more of inflation that exceeds the Fed’s 2% inflation target. It may not be too bad if inflation is just a little above 2%. However, there could major problems in the markets and in the economy if inflation starts to rise well above 2%. The Fed thinks it knows how to handle high inflation. Hiking rates would probably be the primary tool. However, this could cause economic turmoil and a recession. Deposit rates may rise during this time, but once the economy falls into a recession, the Fed would likely go quickly back to rate cuts.
Deposit rates did rise for periods of time during the last zero bound years (from Dec 2008 to Dec 2015). History suggests that we can see small deposit rate hikes even without Fed rate hikes. The 2013 Taper Tantrum was a period when the Fed started to taper its bond buying and long-dated Treasury yields had big gains. For example, the 10-year Treasury note had a yield of 1.86% when 2013 began. By the end of 2013, the 10-year yield had risen to 3.04%.
PenFed’s 5-year CD yield went from 1.15% in the summer of 2013 to 3.04% by December 2013.
CD rates at online banks took more time to rise. Both Ally and Discover’s 5-year CD yields reached a pre-2020 bottom of 1.50% in 2013. By September 2014, Ally’s 5-year CD yield had risen to 2.00% and Discover’s had risen to 2.10%.
CD rates did fall after the above highs. PenFed’s 5-year CD yield fell to 1.21% in 2014 and then again in 2016. Ally and Discover’s 5-year CD yields fell to around 1.75% in 2016 and 2017. Even after the first couple of Fed rate hikes, it took awhile before the 5-year CD rates to rise. Those early Fed rate hikes impacted the markets and the economy, resulting in lower Treasury yields.
For online savings accounts, there were some increases during the 2008-2015 zero rate years, but for the most part, rates remained below 1%. No sustained increases occurred until we were well into the Fed’s rate hiking cycle in mid 2017.
So based on the 2008-2015 zero rate history, we could see some modest increases of CD rates and a few CD specials that may offer rates a little higher than the online bank CDs. We’ll probably have to see 10-year Treasury yields well above 2% before we start to see any significant improvements in CD rates. On Tuesday, the 10-year yield was 1.62% at the market’s close.
One condition that’s different from the 2008-2015 zero rate period is the fiscal stimulus that exists today. The massive numbers of government stimulus checks may keep banks filled with deposits with little incentive to raise any deposit rates.
The possibility of small CD rate increases over the next couple of years isn’t anything to get excited about, but it does suggest that we shouldn’t rush into CDs now. Keeping more cash in online savings accounts and/or high-yield reward checking accounts seems to be a better strategy than opening new CDs.
There are still many reward checking accounts with yields of at least 2%. Of course, these have balance caps (typically $25k or lower) and monthly activity requirements to qualify for the high yield. Also, it’s likely we’ll see some rate cuts and balance cap reductions. However, many reward checking account rates held up fairly well during the 2008-2015 zero rate period.
Long-term CDs now only make sense if we’re headed back into a long period of very low rates. In that case a 1% long-term CD will be better than a top savings account with a rate under 0.50%.
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.