The Fed decided to lower rates for the third time. The target range of the federal funds rate was reduced 25 bps to 1.50% to 1.75%. We are now down 75 bps from the recent peak of the target range for the federal funds rate.
The following is an excerpt of today’s FOMC statement with the all important rate cut description:
In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 1-1/2 to 1-3/4 percent.
The big change in today’s FOMC statement as compared to the September statement was the suggestion that the Fed has moved back to a pause mode. Here’s what changed in the statement:
From the September FOMC statement:
As the Committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.
From today’s FOMC statement:
The Committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate.
The phrase “will act as appropriate to sustain the expansion” was added at the June meeting. We saw the first rate cut at the next meeting in July. Now that this phrase has been removed, the Fed will probably not be so open to a rate cut in December.
Like the September meeting, two committee members (Esther L. George and Eric S. Rosengren) voted against the policy action because they wanted to hold rates steady. Unlike the last meeting, James Bullard did not vote against the policy action. In September, James Bullard voted against the policy action because he wanted a larger rate cut of 50 bps.
One important thing came from Fed Chair Jerome Powell’s press conference today. When asked by a reporter about what it would take for the Fed to consider hiking rates next year, the Fed Chair focused on inflation. The following was a critical excerpt of the Fed Chair’s response:
I think we would need to see a really significant move up in inflation that’s persistent before we would consider raising rates to address inflation concerns.
This appeared to give comfort to the markets. Soon after this reply, the S&P index had a large rise that pushed the index 12 points above yesterday’s close.
I had thought that the markets would tank on the Fed’s pause signals. That didn’t happen. Instead, this inflation news that suggests a very long pause period boosted the stock market.
For savers, this suggests that it may be a long time before the next Fed rate hike and higher deposit rates.
Future FOMC Meetings
The next three FOMC meetings are scheduled for December 10-11, January 28-29, and March 17-18. The December and March 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 and 2020
Based on Fed Chair Jerome Powell’s comment about inflation, we may be starting a long period in which the Fed holds rates steady. The odds of further cuts in 2020 appear much higher than rate hikes based on the Fed Chair’s comments. Based on the recent history of inflation, it’s doubtful things will change anytime soon to meet the Fed Chair’s informal criteria for rate hikes.
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 10/30/2019:
- American Express High Yield Savings: Peaked @ 2.10%, Now @ 1.90% (-20 bps)
- Synchrony High Yield Savings: Peaked @ 2.25%, Now @ 1.90% (-35 bps)
- Goldman Sachs Bank Online Savings: Peaked @ 2.25%, Now @ 1.90% (-35 bps)
- Ally Online Savings: Peaked @ 2.20%, Now @ 1.80% (-40 bps)
- PurePoint Financial Online Savings: Peaked @ 2.35%, Now @ 1.80% (-55 bps)
I think it’s likely that we’ll see more online savings account rate cuts in November and into December. The rate cuts should slow in December if the Fed does hold rates steady in December. With the target federal funds rate range now at 1.50% to 1.75%, I’m afraid we should expect most online savings account rates to move near this range over the next few months.
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 nine Fed meetings. Most of the declines occurred before the Fed decided to start cutting the federal funds rate.
- 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%
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. The top 5-year brokered CD rate was 3.60% last November. As of last week, it’s down to 1.90%. That’s a fall of 170 bps. On the positive side, this is up from the last meeting when the top 5-year brokered CD rate was 1.70%.
Direct CD rates from online banks and credit unions haven’t fallen as much as Treasury yields and brokered CD rates, but we have started to see an increasing number of rate cuts, and the size of the rate cuts have been growing. Here are a few examples of how 5-year CD rates have fallen at five popular online banks:
- American Express 5yr CD: Peaked @ 3.10%, Now @ 2.15% (-95 bps)
- Synchrony 5yr CD: Peaked @ 3.10%, Now @ 2.30% (-80 bps)
- Goldman Sachs Bank 5yr CD: Peaked @ 3.10%, Now @ 2.25% (-85 bps)
- Ally Bank 5yr CD: Peaked @ 3.10%, Now @ 2.25% (-85 bps)
- PurePoint Financial 5yr CD: Peaked @ 3.10%, Now @ 2.25% (-85 bps)
Based on the yields of Treasury notes and brokered CDs, I think direct CD rates may still fall some more even if the Fed does enter into a pause period.
Deposit Account Strategies
Without the possibility of Fed rate hikes anytime soon, deposit rates will likely be pretty stable in 2020, and it may take multiple years before we see substantially higher rates on savings accounts and CDs. This appears to be the best case scenario for savers. The other possibility is that the economic slowdown deepens. Even if there’s no recession, a slowdown may cause the Fed to cut rates a few more times. Even if it’s not severe enough to cause more Fed rate cuts, it would probably keep inflation muted, and that would cause the Fed to hold rates steady for a long period of time. I don’t see any likely scenario in which we return to higher rates in the next year or two.
In this type of rate environment, it seems doubtful that we’ll see any widespread CD rate increases in the next one or two years. Thus, mid-term and long-term CDs make sense now. 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.
CDs with 3% yields still exist, but they have become harder to find. In fact, it’s very difficult to find any at banks. There are still a few credit unions that are offering them (like Navy Federal Credit Union). These have been lasting longer than I had anticipated, which is good news. However, I wouldn’t count on them lasting too much longer.
Mid-Term and Long-Term CDs with Small Early Withdrawal Penalties
If you are worried about locking money into CDs, look for CDs with early withdrawal penalties (EWP) of no more than six months of interest. The best deals are currently from credit unions that are still offering 3% CDs with EWPs of only six months of interest. These include PSECU, Justice FCU and Western Vista FCU. All three of these credit unions make it possible for people in any state to join via an association membership.
To see how the EWP affects the yield when you close a CD early, please refer to our CD Early Withdrawal Penalty Calculator.
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 earlier this month, 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 fell in August from 2.70% APY to 2.50% APY. 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 2.30% APY as of 10/30/19 (Rate had been 3% in March). 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 10/30/2019 (Rate had been 60 bps higher in July.) 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.
With rates likely 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 10/29/19. Note, it’s very likely that these rates will be falling in the next week.
- 2.05% APY 11-month No-Penalty CD ($1k min) - CIT Bank
- 2.00% APY 7-month No-Penalty CD ($500 min) - Goldman Sachs Bank USA
- 2.00% APY 11-month No Penalty CD ($25k min) - Ally Bank
- 1.90% APY 13-month No-Penalty CD ($10k min) - PurePoint Financial
- 1.90% APY 11-month No-Penalty CD ($500 min) - Goldman Sachs Bank USA
- 1.85% APY 13-month No-Penalty CD ($500 min) - Goldman Sachs Bank USA
- 1.80% APY 6-month No-Penalty CD ($500 min) - Investors eAccess
Remember 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 that rates will rise in the next year. Any rate changes will probably be falling rates. In this kind of environment, CDs can help you earn more interest than savings accounts. Look at the CDs mentioned above if you are concerned about locking up your money. Also, a CD ladder of long-term CDs is always a useful strategy for your safe money.
It’s important to remember that no one, including me, can predict future interest rates. Last year was a reminder of this when it appeared we might be seeing 4% savings account rates in 2019.