Third Fed Rate Hike of 2018: Deposit Rate Predictions and Strategies
The Fed moved as expected by raising the federal funds rate by 25 basis points. This is the third Fed rate hike of 2018 and the eighth rate hike since the Fed started to raise rates in December 2015. Here’s that all important paragraph in today’s FOMC statement:
In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 2 to 2-1/4 percent.
This paragraph is shorter than it has been in the past. The Fed removed the sentence about monetary policy remaining accommodative.
The opening paragraph in the FOMC statement that describes the state of the economy is essentially the same as what was in the August FOMC statement. The word “strong” was used three times:
economic activity has been rising at a strong rate. Job gains have been strong. [...] Household spending and business fixed investment have grown strongly.
Just like all of this year’s FOMC meetings, today’s decision was unanimous. All FOMC participants voted in favor of the rate hike.
Economic Projections
The Fed released its updated economic projections which include projections for the Fed funds rate in the form of the dot plot. The 2018 GDP projections were revised up from June. The Fed’s projections now show a 3.1% GDP change at the end of 2018, up from 2.8% from the June projections. For the end of 2019, the new projections show a 2.5% GDP change, up from 2.4% in June. The other economic numbers didn’t show an improvement for 2019 and 2020. Unemployment rate projections remain at 3.5% for 2019 and 2020. Also, core PCE inflation projections remain at 2.1% for 2019 and 2020.
In regards to the Fed funds rate projections, a large majority of the FOMC participants now anticipate four rate hikes for this year. Out of the 16 participants, 12 anticipate that the midpoint of the target range of the Fed funds rate will be 2.375%. That’s the midpoint for the range of 2.25% to 2.50%.
However, the Fed funds rate projections for 2019 and 2020 didn’t change from June. The projections still show a midpoint for the target range of the Fed funds rate of 3.1% for the end of 2019. That would require three 25-bps rate hikes in 2019 after one more 25-bps rate hike for this year. For 2020, the projections show a midpoint of 3.4%. That would require just one rate hike in 2020 after the 2018 and 2019 rate hikes as described above.
One positive change is an upward revision of the longer run Fed funds rate from 2.9% to 3.0%.
Fed Chair’s Press Conference
One of the questions Fed Chair Jerome Powell was asked was the significance of the removal of the accommodative language in the FOMC statement. Fed Chair Powell suggested that its removal wasn’t a big deal. Below is an excerpt of his answer to a reporter’s question on this issue:
Its useful life was over. We put that in the statement in 2015 just when we lifted off, and the idea was to provide assurance that we weren’t trying to slow down the economy, and in fact, interest rates were still going to support economic activity. Well, that purpose has been well served and the language now doesn’t really say anything that’s important to the way the committee is thinking about policy going forward. That’s why that came out.”
At the start of the press conference, Fed Chair Powell noted that 10 years have now passed since the depths of the financial crisis. I just noted that yesterday (September 25) was the 10-year anniversary of WaMu’s failure and its acquisition by JPMorgan Chase. It remains the largest bank failure in the nation's history. I reviewed this failure and its impact to depositors in my 2010 post on the two-year anniversary of WaMu’s closure.
Future FOMC Meetings
The next three FOMC meetings are scheduled for November 7-8, December 18-19 and January 29-30, 2019. The December meeting will include the summary of economic projections. Both the December and January meeting will include a press conference by the Fed Chair. Starting in 2019, all meetings will include a press conference.
What Savers Should Expect in 2018 and 2019
This year, online savings account rates have moved inline with the Fed funds rate. It is likely this will continue. Below shows how the major online savings and money market account rates have changed in the last four months. In June, the midrange of the target federal funds rate was increased to 1.875%. Since June, several of the major online banks have raised their savings accounts to be close to this. These include Goldman Sachs Bank USA (1.90% APY), Ally Bank (1.85% APY), Barclays (1.85% APY) and Synchrony Bank (1.85% APY). Thus, by the December FOMC meeting, we should see most of the major online banks with savings account rates above 2.00%.
- Sep 26: Federal Reserve Target Funds Rate: 2.00% to 2.25%
- Sep 19: Goldman Sachs Bank USA High-yield Savings: 1.90% APY
- Sep 19: Vio Bank High Yield Online Savings: 2.11% APY
- Sep 10: HSBC Direct Savings: 2.01% APY
- Sep 7: CIBC Agility Savings: 2.10% APY
- Sep 5: MySavingsDirect MySavings: 2.25% APY
- Aug 31: Ally Bank Online Savings: 1.85% APY
- Aug 31: Discover Bank Online Savings: 1.80% APY
- Aug 24: Capital One 360 Money Market: 1.85% APY, $10k+
- Aug 23: American Express National Bank High Yield Savings: 1.80% APY
- Aug 10: Vio Bank High YIeld Online Savings: 2.10% APY
- Aug 9: Goldman Sachs Bank USA High-yield Savings: 1.85% APY
- Aug 3: Ally Bank Online Savings: 1.80% APY
- Aug 2: FNBO Direct Online Savings: 1.85% APY
- Aug 1: Barclays Online Savings: 1.85% APY
- July 24: Synchrony High Yield Savings: 1.85% APY
- July 18: HSBC Direct Savings: 1.80% APY
- July 10: Capital One 360 Money Market: 1.75% APY, $10k+
- July 9: Citizens Access Online Savings: 2.00% APY, $5k+
- July 6: Discover Bank Online Savings: 1.75% APY
- July 2: Sallie Mae Bank Money Market: 1.90% APY
- June 29: Ally Bank Online Savings: 1.75% APY
- June 27: Barclays Online Savings: 1.75% APY
- June 25: CIBC Agility Savings: 1.90% APY
- June 22: Goldman Sachs Bank USA High-yield Savings: 1.80% APY
- June 22: American Express National Bank High Yield Savings: 1.75% APY
- June 15: Discover Bank Online Savings: 1.65% APY
- June 13: Federal Reserve Target Funds Rate: 1.75% to 2.00%
- June 11: FNBO Direct Online Savings: 1.75% APY
- June 5: Synchrony High Yield Savings: 1.75% APY
- May 30: PurePoint Financial Online Savings: 1.90% APY, $10k+
- May 25: Sallie Mae Bank Money Market: 1.75% APY
- May 24: CIT Bank Money Market: 1.85% APY
- May 15: Goldman Sachs Bank USA High-yield Savings: 1.70% APY
Right now, the top online savings account and money market rate is 2.25% APY, with five banks offering this.
The first bank to offer this rate nationwide was Northern Bank Direct in early June. The offer was a money market promotion with a 2.26% APY for up to $250k guaranteed through June 30, 2019. This didn’t last long. It ended on June 20th.
The first bank to offer 2.25% APY and maintain that rate was Northfield Bank. In late July, Northfield Bank increased the rate of its Online Platinum Savings Account to 2.25% APY for balances up to $100k.
MySavingsDirect is the first to offer a nationwide savings account with a 2.25% APY for all balances. That was first introduced on September 5th.
Based on this history, it is reasonable to expect a bank to offer 2.50% APY nationwide on a savings account or money market account in the next two months.
Lastly, don’t hold your breath for deposit rate hikes at your brick-and-mortar banks. As I showed in my recent rate trends chart, the average savings account rates at brick-and-mortar banks and credit unions remain low.
Deposit Account Strategies
Based on the Fed’s rate projections, it looks likely we’ll see at least four more Fed rate hikes before the end of 2019. And based on the recent rate history of online savings accounts, we’ll likely see online savings account rates to be around 100 bps higher a year from now.
The difficult question is how long-term rates will change in the next year. The top nationally-available 5-year CD yield is around 3.50%, which is 125 bps above the top savings account. That spread may shrink over the next year. We saw that back in 2006 and 2007 when top savings account rates were close to the top 5-year CD rates. Let’s say that spread shrinks from 125 bps to 75 bps. A year from now, top savings account rates may be around 3.25%, and the top 5-year CD rates may be around 4.00%.
One strategy for your safe money is to keep your money in top savings accounts, and wait for signs we’re at the top of the rate cycle. Then it would be the time to lock into long-term CDs. While the money is in savings accounts, you can keep an eye out for those hot CD deals. It’s important to remember that there could be surprises in future interest rates. Conditions can change fast, and we may not recognize the significance until rates have already responded.
This strategy makes it important to choose internet banks that have solid ACH transfer capabilities. If you find a hot CD deal or if your internet bank falls behind on rates, you’ll want to be able to easily and quickly move your money. You don’t want an internet bank that has small ACH transfer limits or slow ACH transfer speeds.
If you want to keep things simple for your safe money, CD ladders are a tried-and-true way to invest in CDs. The ladder ensures you take advantage of higher rates as interest rates rise. You may want to favor shorter-term CDs for your ladder. Top 5-year CD rates aren’t much higher than top 3-year and 2-year CD rates. However, beware of short-term CDs. At many internet banks, rates of CDs with terms of under one year continue to be well below savings account rates. These short-term CDs don’t make any sense. If you’re starting a CD ladder, don’t choose short-term CDs with rates under savings account rates.
Where the Fed helped me most is at Bellco. There my 5 year index advantage CD interest rate jumps another quarter point. OK, so you say 3.4% is not special today. No disagreement. But this CD was opened in the spring of 2017 when interest rates were generally lower than they are now. So I'm happy to be earning that rate on 2017 money, and if the Fed raises another quarter percent in December the Bellco CD will be at 3.65%. Will they? I dunno. It's anyone's guess. But it has been fun harvesting the rate increases on that CD so far . . . . . . not that anyone (me included) is gonna become too fat, after taxes and inflation, on 3.4%! Am instead merely doing the best I can.
The best way to make a "safe profit" is to run your own business.
Before I retired, my business made a profit every year for most of my adult life.
Prior to that I was a wage slave for about 10 years after graduating from university.
During most of that time you could beat inflation with staggered 3 month Treasuries.
You had to keep some cash liquid just to cover timing issues between A/P and A/R.
The rest was put into a 5 year CD ladder to cover the ups and downs of the business cycle.
With that approach I could always have enough cash just in case I ever ran a loss.
Even during the Great Recession, I managed to squeeze-out enough to cover expenses.
And, have enough money to live-on. Kept the business, house and wife.
At lot of people I know went bankrupt because they had practically everything in the stock market.
Because they didn't have enough cash on hand they lost their businesses, houses and wives.
So, they had to go back to being wage slaves and start all over again.
No thanks, I preferred being ultraconservative so that I could make it thru the down cycles intact.
Now that I'm retired and sitting on a bundle of cash, the stock market is even less attractive.
I can afford to lose 1% a year to inflation versus the 30% lost during the last downturn in one year.
The fact of the matter is that you can beat inflation by merely purchasing 5 year TIPS.
They're yielding close to 1% over inflation right now.
That and short-term CD's are good enough for me.
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The other benefit to owning a business is that unlike having one employer, you can have multiple clients in disparate industries. During the last slaughter in 2009, things dried-up rapidly. As projects were completed, there weren't any new ones in the pipeline. Some clients that I had for over 20 years postponed upcoming projects indefinitely. So, those small municipal government contracts came in handy. They're slow to pay but do so on a regular basis.
Even in 2009, I still made money. Not much. But enough. By 2010 upper level management in one of my IT manufacturing clients decided to cough-up some cash for the pet projects that they could no longer postpone without jeopardizing their bonuses. That turned-out to be a banner year that more than made-up for 2009.
Too bad they got rid of income averaging!
Once one reaches a certain age (let's call it "retirement" for want of a better term), one is either compelled (via RMDs) or nudged (via one's retirement budget) to cash in on pre-tax investments. IRAs/401Ks, as it were. For many, equities are a goodly part of said investments. For example, Vanguard's balanced index fund is 60% equities/40% bonds. While balanced, it can take a major hit in a bear market. If a bear market occurs on the cusp of retirement, a retiree can be faced with a dilemma. Take distributions in a down market, tighten one's bel, or trust to luck.
Enter those dowdy fixed-income investments, AKA CDs. A ladder of IRA CDs, properly managed, can "bridge" many years of down markets. Instead of taking losses in such years from a portfolio consisting (in whole or in part) from equities, you let such funds ride, and take distributions (such as RMDs) from IRA CDs. My wife and I have roughly 13 years of RMDs in IRA CDs (we are both 71). In years when equities are doing well, we harvest our gains and plop a tad in IRA CDs. Think acorns and squirrels.
Thus, this "safe money" enables us to keep on keeping on with our long-term balanced portfolio of stocks and bond funds.
Just my $.02
https://www.reuters.com/article/us-usa-fed/fed-chief-powell-signals-central-bank-is-done-with-signaling-idUSKCN1M7299
Powell doesn't seem to want to telegraph rate hikes and instead tells us to follow the job and employment data as well as the inflation numbers. Ok fine I already do that but even if everything is going great it is still no guarantee the FED will hike rates. Take this year for example out of 8 meetings the FED will only hike 4 times and the data was good.
This could really shake things up if it gets out.
i cant folow that math but trust YOU!
moost of us cannt follow the math, but we can hearr depllorable and for that i am also greatful
This is where you put the EWP when you close a CD before maturity. This will reduce your taxable income.
Assume you have a 100K CD at 3% and the EWP is 12 months interest. Forget compounding for this example.
12 months interest = 3% of 100K or $3,000
If you reduce your income by $3,000 and you're in the 24% bracket then you're effective EWP is 76% of 3K = $2,280 or 2.28%.
This is very useful information if you're considering closing a lower rate CD and replacing it with a higher rate CD.
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A RED TIDE wonderful
But the stock markets do bettter when the president is blue yes? facts are confusing!