At the completion of its two-day FOMC meeting, the Fed issued a statement very similar to its November statement. The only change was more details in the forward guidance of asset purchases. The composition of the asset purchases didn’t change. Some economists had expected the Fed to shift its purchases to longer-term maturities.
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 which indicates more optimism for the economy in 2021. On the down side, there was little change to the federal funds rate forecast. It still looks very unlikely that the Fed will hike rates through 2023.
First, here are excerpts from the November and December FOMC statements which highlight the only change in the statements:
Excerpt from November FOMC Statement:
In addition, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency mortgage-backed securities at least at the current pace to sustain smooth market functioning and help foster accommodative financial conditions, thereby supporting the flow of credit to households and businesses.
Excerpt from December FOMC Statement
In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee's maximum employment and price stability goals. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.
There was no change in the federal funds rate guidance. That guidance suggests that the Fed won’t hike rates until inflation has risen substantially for a period of time:
The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.
No one dissented at today’s meeting.
Summary of Economic Projections (SEP)
The primary change in today’s SEP as compared to the September SEP is upgrades to GDP and employment forecasts. In summary, the FOMC participants are more optimistic in their forecasts for 2021 and beyond.
First, the economy performed better in 2020 than had been expected. The June GDP forecast for the end of 2020 was a decline of 6.5%. That was upgraded to a decline of 3.5% in September, and it was again upgraded to a decline of only 2.4% in today’s SEP. The June unemployment rate forecast for the end of 2020 was 9.3%. That was upgraded to a rate of 7.6% in September, and it was again upgraded to a rate of 6.7% in today’s SEP.
For 2021 and future years, forecasts were also upgraded. GDP is forecast to rise 4.2% in 2021. In September, it was forecast to rise by 4.0%. Unemployment rate is forecast to fall to 5.0% by the end of 2021. That’s quite a bit lower than the September forecast of 5.5%.
Unlike the GDP and employment forecasts, the inflation forecasts aren’t encouraging for rate hikes. The inflation forecasts did increase from the September forecasts, but only slightly. The core PCE is forecast to increase to 1.8% in 2021 (up from 1.7% that was forecasted in September). For 2022, the core PCE is forecast to increase to 1.9% (up from 1.8% that was forecasted in September). Core PCE is forecasted to finally reach the Fed’s 2% target in 2023 which is the same as the September forecast.
The little change in the inflation forecasts may be the reason that the federal funds rate forecasts changed little from September. The majority of FOMC participants still anticipate that the federal funds rate will remain unchanged through 2023. Five of the 17 participants anticipate a rate hike through 2023. In September, four of the 17 anticipated a rate hike through 2023.
Future FOMC Meetings
The next three FOMC meetings are scheduled for January 26-27, March 16-17, and April 27-28. The March meeting will include the summary of economic projections.
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.
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 deposit rate hikes even without Fed rate hikes.
For online savings accounts, Ally Bank and Discover’s savings account rates reached a pre-2020 bottom in 2012 and 2013 of 0.84% and 0.80%, respectively. Rates did increase some before the first Fed rate hike. Ally’s savings account rate reached 0.99% in December 2014 and Discover’s reached 0.95% in June 2015.
Rate increases are more likely to be larger for CDs.
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%.
The best example of CD rate hikes during the last zero bound years was at PenFed. Its 5-year Certificate yield fell to a pre-2020 bottom of 1.15% in May 2013. The rate began rising in September, and by December 2013, PenFed’s 5-year yield had reached 3.04%.
Based on how CD rates have plummeted this year (see online 1-year and 5-year averages), I doubt we’ll see any 2% CDs in 2021. However, if 2020-2021 is similar to 2013-2014, it’s possible that we’ll see some rate increases. At the very least, online savings account rates should stop falling and we may see small increases in CD rates with more CD rates above 1%.
The possibility of small CD rate increases next year 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-bound 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.