Fed Meeting: the Pause Continues - Review of Impact to Savers

As expected, the Fed decided today to hold rates steady. This is the second straight meeting in which the Fed has held 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 returning to the Committee's symmetric 2 percent objective.

There were only two minor changes in the FOMC statement. The Fed’s description of household spending changed from “rising at a strong pace” in December to “rising at a moderate pace” today. The other change was in the last sentence of the rate description that I quoted above. The Fed changed “inflation near the Committee's symmetric 2 percent objective” to “inflation returning to the Committee's symmetric 2 percent objective.” Fed Chair Powell was asked about this change in the press conference. He said it was changed to “send a clearer signal that [they] are not comfortable with inflation running persistently below [their] 2% symmetric objective.” It’s another sign that there will be little chance of a rate hike as long as inflation is running low.

All of the FOMC voting members voted for today’s policy action. No one dissented, and that included the four Federal Reserve Bank presidents who rotated in as new voting members.

No updates to the Fed’s Summary of Economic Projections (SEP) were released at this meeting. The next meeting in March will include SEP updates, which includes the dot plot.

Federal Funds Rate Futures

The Fed Funds futures markets (via the CME FedWatch Tool) are now pricing in an 8.9% chance of a Fed rate cut in March. This is up from 7.7% on Tuesday. The odds of a rate hike in March are now zero. These odds had been 11.6% on Tuesday. The CME FedWatch Tool is no longer showing any chance of a rate hike anytime in 2020. The odds that the federal funds rate will be lower by December are now 83.8%. That’s a large increase from Tuesday when the odds were 74.0%.

Future FOMC Meetings

The next three FOMC meetings are scheduled for March 17-18, April 28-29, and June 9-10. The March and June 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

We appear to be at the start of a long period in which the Fed holds rates steady. That’s pretty much what we saw after the December meeting. One thing that has changed is that I’m sensing slightly higher odds of a Fed rate cut within a year from now. My feel for the odds of a Fed rate hike have gone from very low to very, very low.

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 3:00pm 1/29/2020:

• American Express High Yield Savings: Peaked @ 2.10%, Now @ 1.70% (-40 bps)
• Synchrony High Yield Savings: Peaked @ 2.25%, Now @ 1.70% (-55 bps)
• Goldman Sachs Bank Online Savings: Peaked @ 2.25%, Now @ 1.70% (-55 bps)
• Ally Online Savings: Peaked @ 2.20%, Now @ 1.60% (-60 bps)
• PurePoint Financial Online Savings: Peaked @ 2.35%, Now @ 1.80% (-55 bps)

Two of the above five online banks did not drop their savings account rates since the last Fed meeting on December 11th. Synchrony and Ally reduced their savings account rates by 10 bps since December 11th, and American Express lowered its rate by 5 bps. That does show a slowing of rate cuts, and I wouldn’t be surprised if that continues.

CD Rates

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 11 Fed meetings. Most of the declines occurred before the Fed decided to start cutting the federal funds rate. The yields from September to December had appeared to have stabilized. Since the December meeting, the yields have declined substantially. However, it should be noted that most of the declines have come after the recent news of the coronavirus outbreak.

• 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%
• Jan 29, 2020: 10yr @ 1.60%, 5yr @ 1.41%

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 this week, it’s down to 1.85%. That’s a fall of 175 bps. It’s also down from the last meeting when the rate was 1.95%.

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 3:00pm 1/29/2020:

• American Express 5yr CD: Peaked @ 3.10%, Now @ 2.15% (-95 bps)
• Synchrony 5yr CD: Peaked @ 3.10%, Now @ 2.15% (-95 bps)
• Goldman Sachs Bank 5yr CD: Peaked @ 3.10%, Now @ 2.25% (-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)

Out of the above five banks, only one of these (Synchrony Bank) lowered its 5-year CD rate since the December meeting (2.25% to 2.15% APY). The 5-year CD rate actually went up at Goldman Sachs Bank (2.15% to 2.25% APY). No rate changes occurred at the other three banks. Overall, the average 5-year CD rate from these five banks remained unchanged since the December meeting. That’s a positive sign that we are passed the bottom of CD rates. However, my optimism is restrained by the declines in Treasury yields and brokered CD rates.

Deposit Account Strategies

The combination of very low odds of a Fed rate hike in 2020 and rising odds of a Fed rate cut, leads me to think that it’s unlikely that we’ll see higher rates on savings accounts and CDs in 2020. The economy would probably have to be very strong for there to be upward pressure on CD rates and for conditions to develop that would move the Fed into hiking rates. Once the Fed increases rates, online savings account rates would slowly follow.

Any economic slowdown this year will likely cause the Fed to cut rates a few more times. A severe slowdown that turns into a recession would cause the Fed to return rates to near zero. In this scenario, deposit rates will likely decline and stay low for multiple years.

In this type of rate environment, mid-term and long-term CDs should be considered. 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 competitive CDs with early withdrawal penalties (EWP) of no more than six months of interest. Please refer to my recent CD summary to review the highest CD rates. To see how the EWP affects the yield when you close a CD early, please refer to our CD Early Withdrawal Penalty Calculator.

Add-On CDs

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 2.30% APY as of 1/29/2020. 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 1/29/2020 (Rate had been 3% in March 2019). 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 1/29/2020 (Rate had been 60 bps higher in July 2019.) 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. I just did a review of this CD last week.

No-Penalty CDs

With the possibility that rates will continue 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 1/29/2020.

• 2.00% APY 11-month No-Penalty CD ($500 min) - Goldman Sachs Bank USA
• 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 7-month No-Penalty CD ($500 min) - Goldman Sachs Bank USA
• 1.85% APY 11-month No Penalty CD ($25k min) - Ally Bank
• 1.85% APY 11-month Liquid CD ($5k min) - Citizens Access
• 1.80% APY 6-month No-Penalty CD ($500 min) - Investors eAccess
• 1.75% APY 14-month No-Penalty CD ($10k min) - PurePoint Financial
• 1.75% APY 11-month No-Penalty CD ($1k min) - CIT Bank
• 1.71% APY 11-month No Penalty CD ($5k min) - Colorado Federal Savings Bank
• 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 of a Fed rate hike in the next year. The changes since the December meeting have only strengthened this view. If the Fed continues to hold steady on rates, expect online savings account rates to also hold steady.

It’s possible that we could see some CD rate increases if the economy remains strong. We would first see higher yields in Treasury notes and bonds. So far this year, the opposite of that has been happening. Treasury yields have declined. Hopefully, the virus fears will be shown to be overblown and the economy will surprise on the upside. Then we may see Treasury yields rise followed by rising CD rates. If this optimistic scenario plays out, it will take time.

It’s important to remember that no one, including me, can predict future interest rates. The end of 2018 was a reminder of this when it appeared we might be seeing 4% savings account rates in 2019.