As expected, the Fed reaffirmed its “patience” policy by holding steady with the federal funds rate target. The post-meeting statement contained the same patience language that was in previous meeting statements:
In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.
One change from the March statement is the description of growth of economic activity. In March, the statement read, “growth of economic activity has slowed from its solid rate in the fourth quarter.” Today’s statement read, “economic activity rose at a solid rate.” This change should reduce the odds of a 2019 Fed rate cut.
However, another change raises the odds of a 2019 rate cut. That change is the Fed’s view of inflation. Today’s statement clearly admits that core inflation has declined and is running below the Fed’s target:
On a 12-month basis, overall inflation and inflation for items other than food and energy have declined and are running below 2 percent.
In March, the statement read, “inflation for items other than food and energy remains near 2 percent.”
Fortunately, the Fed still views these low inflation measurements as transitory. In the post-meeting press conference, Fed Chair Jerome Powell did warn that if inflation were to run persistently below their target for a sustained period of time, it would impact their policy decisions. The Fed Chair claimed that they are “strongly committed to [the] 2% inflation objective and to achieving it on a sustained and symmetric basis.” If inflation continues to run low, the Fed may cut rates to prove they are serious about this claim, even with strong economic growth. However, I don’t see the Fed acting quickly in this direction. Unless the economy experiences a significant slowdown, low inflation probably won’t force the Fed to cut rates until late 2019 at the earliest.
This policy action was an unanimous decision with no policymaker dissenting.
Federal Funds Rate Futures
The federal funds rate futures as shown by the CME FedWatch Tool continue to show zero chance of a Fed rate hike in 2019. However, the odds of a rate cut have gone down from yesterday. The futures now show only a 6.7% chance of a rate cut at the June meeting. That’s down from 22.0% yesterday. The futures now show a 52% chance of a rate cut by December. That’s down from 66% yesterday.
Future FOMC Meetings
The next three FOMC meetings are scheduled for June 18-19, July 30-31, and September 17-18. The June and September meetings will include the summary of economic projections. All meetings now include a press conference by the Fed Chair.
What Savers Should Expect in 2019
With little chance that the federal funds rate will rise this year, online savings account rates may be at a peak. Several online savings account rates are already near the top of the target range of the federal funds rate (2.25% to 2.50%). The well-established internet banks like Ally and Discover Bank have online savings account rates just below this range while the newer internet banks that are being more aggressive have rates that are in this range. These internet banks include PurePoint Financial, Rising Bank, Vio Bank and Citizens Access. As long as the Fed holds steady, I doubt we’ll see much movement in these savings account rates.
CD rates forecasting is more difficult. Several other factors in addition to movement (or lack of) in the federal funds rate impact this. Low inflation is one thing that is producing downward rate pressure. This is seen first in the Treasury market. Long-dated Treasury yields have been falling since November.
On November 8, 2018, the 10-year and 5-year Treasury yields were 3.24% and 3.09%, respectively. After the last Fed meeting on March 20th, the 10-year and 5-year Treasury yields were 2.54% and 2.34%, respectively. Now, the yields are even lower at 2.52% and 2.31%. In less than six months, the 10-year yield fell 72 bps and the 5-year yield fell 78 bps.
You can also see the rate declines in brokered CDs. On November 6, 2018, the top 5-year brokered CD rate at both Vanguard and Fidelity was 3.55%. Last week, the top 5-year brokered CD rate was 2.75%. That’s a fall of 80 bps. That decline is actually very similar to the 5-year Treasury yield decline.
Top direct CD rates have not fallen as much, but they have fallen. On November 6, 2018, the top 5-year CD APYs were 4.00% for credit unions and 3.50% for banks. Last week, the top APY was 3.40% for both credit unions and banks.
Direct CD rate changes tend to lag brokered CD rates. So it’s likely we will continue to see direct CD rates slowly fall even as the Fed holds rates steady. If economic conditions worsen, larger and more widespread CD rate declines should be expected.
Deposit Account Strategies
Since we are likely at or near the rate cycle peak, I think it makes sense to look at long-term CDs. Many savers avoided these in 2018 as rates were rising. It’s no longer the time to avoid them. 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.
There is still a slight chance that we are not close to the peak of this rate cycle. If you have any worry about being locked into a 5-year CD, make sure the 5-year CDs have early withdrawal penalties (EWP) of no more than six months’ interest. In addition to reducing the risk of being locked into a CD as rates rise, it also gives you more flexibility to be able to use those funds for some other purpose that may arise in the future.
I’ve plugged in some top 5-year CDs into our CD Early Withdrawal Penalty Calculator so you can see how current competitive 5-year CDs compare to competitive 1-year CDs when the 5-year CDs are closed early. Today’s top nationally-available 1-year CD is currently 3.00% APY at CD Bank. The top 5-year CD rate is currently 3.40% APY at University FCU. If that 5-year CD is closed early after one year, the effective yield due to the 90-day EWP is 2.55%. Ally Bank’s 5-year CD rate is currently 3.00% APY. If Ally’s 5-year CD is closed after one year, the effective yield due to the 5-month EWP is 1.75%.
Please note that some institutions have language in their disclosures that give the institution the right to disallow a request by a customer to make an early withdrawal of principal. In other words, there’s no guarantee that an early withdrawal of principal will be possible for some banks and credit unions. Also, there have been cases when credit unions have increased the early withdrawal penalties on existing CDs. Caveat emptor.
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.
One of the top 5-year CDs that are included in the above CD EWP Calculator allows add-on deposits. It’s the 5-year CD special at GTE Financial Credit Union. The Jumbo special earns 3.30% APY. This requires a $100k minimum deposit. The regular special earns 3.04% APY, and it requires only a $500 minimum deposit. Please refer to my review of these CD specials for more details. Please note that these specials may not last much longer.
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 currently earns 2.90% APY (10 bps lower since March 20). 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. 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 feature without the interest-rate feature. So if the CD rate falls, you don’t have to worry about your CD rate falling when you make the add-on deposit.
Deposit Account Strategy Summary
It’s now time to seriously consider long-term CDs for your safe money. Choosing 5-year CDs with early withdrawal penalties of no more than 6 months of interest can help reduce the risk of being locked in if rates should happen to rise in the future. Also, add-on CDs can help deal with the possibility of falling rates. If rates do fall, you can always add more to the add-on CD.