Fed Meeting: Still No Signs of Rate Hikes - Strategies for Savers


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.

  |     |   Comment #1
Unfortunately, low rates on Savings and short term CD's are going to be a reality for quite some time. If inflation fears drive up longer term US treasuries yields we could potentially see some higher 3-5 year CD rates especially if Bank Deposits start moving into the Stock Market or other investment options.
  |     |   Comment #2
If there's any silver lining to lower interest rates into the foreseeable future, it may be that those of us in our 60s, heading into Medicare coverage, will have less revenue to flip us up into the next higher tax and IRMAA brackets.
  |     |   Comment #3
I get the psychic benefits, but the IRMAA is only a small fraction of the income you need to be subject to it or for the next IRMAA bracket. So to see it as a silver lining would mean that it's at least a small consolation to have thousands of dollars less in income in order to save hundreds of dollars on IRMAA. Not exactly logical.

But I get the sentiment. IRMAA is just another thinly disguised tax on one of the precious groups of vulnerable people that politicians care so much about. Even Andrew Cuomo likes seniors more than the Washington crowd.
  |     |   Comment #4
P_D, I take your point, but what's unique (and especially nasty) about IRMAA is the math. With IRMAA, if a person is even so much as $1 above the upper limit of a particular “IRMAA tax bracket” for a certain year, they pay the full monthly premium for the next higher bracket. In most cases this is a large increase. (And so forth, for the next higher IRMAA bracket after that - rinse and repeat.)

With “normal” tax brackets, only the amount of income above the upper limit of the next-lower tax bracket is subject to the higher rate.
  |     |   Comment #5
More stupefying is that today, in 2021, we have no way of knowing (only guessing) what the exact bracket thresholds two years from now, in 2023, will be, when this year's MAGI -- not AGI -- will be looked back upon, to determine our 2023 Medicare premiums for parts B & D.

A truly daunting, black box mystery!

My strategy is to use 2021's brackets as if they were for 2023, and do my best NOT to go over $111k by $1. Else, I figure, in round figures, that it will cost me an extra $1,000 in penalty premium payments. Which means my first $1,000 in hard-earned interest is lost to IRMAA; I'd have to earn $2,000 to keep $1,000 of it. (And this is, of course, before taxes, so much less is actually kept.)

I see why it's been described as a "cliff" . . .
  |     |   Comment #6

I agree with your point. IRMAA is an onerous and aggressive tax. Government loves sneaky taxes that have little popular support for eliminating because they only affect a relatively small number of people. This is one of many.

Unfortunately, when it comes to taxes the "no problem, it's the other guy who has to pay them not me" mentality gives politicians who dream these things up tremendous cover. They are hoping people never figure out that taxes on anyone will hurt them too in the long run.
  |     |   Comment #7
Not only is IRMAA a nasty penalty after paying in for years (just like the fact that the tax on SS income has never been indexed for inflation), but it's not even very progressive. Make a $109001 and pay $176 extra, make $10900100 and pay $423. Ah, the pain of being in the top 20%, but am sure politicians know who they're sticking it to, and it ain't the top 1%.
  |     |   Comment #10
milty milty milty

"the pain of being in the top 20%, but am sure politicians know who they're sticking it to, and it ain't the top 1%."

This is a great example of "stick it to the guy who makes more than me because that's fair" argument.

Remember that the guy in the guy in the top 25% is saying the same thing about you.

How about the government spends less and not sticking it to ANYONE? Why is that solution sacrosanct?
  |     |   Comment #11
Ah, PD . . . you just prefer it seems to live in a regressive world. Am afraid armies and vaccines cost money, so somebody is likely going to get stuck. How much one gets stuck comes down to fairness, and I prefer those that have more pay more, percent wise that is. Unfortunately, it appears that the W-2 and 1099 folks are getting stuck the most, and this needs a remedy.
  |     |   Comment #12
So the fact that the top 1 percent of income earners pay a greater share of individual income taxes (38.5 percent) than the bottom 90 percent combined (29.9 percent) isn't "progressive" enough for you?

And by the way the top 10% pay at least SEVENTY PERCENT of the taxes.

And before you say yes, but what about sales taxes, property taxes and other taxes (the worn out progressive retort)....they also pay a giant disproportional amount of those taxes too.

Exactly what percentage would be their "fair share" in your view?

Also by the way more than half of all US households with incomes under $50k a year PAY NO INCOME TAX AT ALL.  Those are the W-2 workers you are referring to who are getting skewered?

57% of households pay no income tax at all.  0% of households with income over $200,000 pay no income tax.

Why should more than half the population have no skin in the game and a tiny portion of Americans pick up almost all the bills for everyone else?  How long can a country like that survive?...especially when the people who pay all the bills can pack up and leave the country for someplace with less draconian taxes just like they are fleeing high tax states for low tax states right now.  Money is mobile.

Wait, let me see if I can guess.  You want to just outright steal their money if the want to leave.  That's the "progressive" way right?  Hold them hostage for ransom?
  |     |   Comment #13
92% top rate during WWII.  Move to Puerto Rico if you want low/zero personal federal income tax rate...Peter Navvaro lives there most of the year and reportedly pays no federal income tax
  |     |   Comment #14
That's not a tax, it's theft.
  |     |   Comment #15
Whenever I hear Milty refer to the concept of "fairness", my mind travels immediately to the memory of Margaret Wolfe Hungerford. Don't remember Margy? She was ostensibly the most recent to use the quote “beauty is in the eye of the beholder”, at least in its modern form. (https://www.phrases.org.uk/meanings/beauty-is-in-the-eye-of-the-beholder.html)

The point? So is "fairness". In the eye of the beholder, I mean.
  |     |   Comment #9
This gen x-er doesn't expect to see rates rise in my lifetime, unless precipitated by some financial disaster.
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