June Fed Meeting Recap: Rates Hold Steady Again, Only 1 Cut Expected in 2024

The Federal Open Market Committee (FOMC) held the federal funds rate steady at 5.25% to 5.50% for the seventh straight time at the end of its two-day policy meeting on June 12. The benchmark rate has remained in that target range since July 2023. This means that as savers will likely continue to benefit, borrowers won’t find it any less expensive to buy a home or car.

The Fed’s June policy statement was similar to May’s, with one significant departure. In June, the FOMC noted that recently, “There has been modest further progress toward the committee’s 2% inflation objective.”

The Fed also released its quarterly Summary of Economic Projections (SEP), which includes its dot plot. This chart shows where policymakers think the federal funds rate is headed over the next few years.

The latest dot plot forecasts only one rate cut in 2024 — but five total cuts between 2024 and 2025. More cuts had been predicted in the March SEP, with three expected in 2024 and another three in 2025.

How will the Fed’s actions affect deposit rates?

With the Fed holding its benchmark rate steady, deposit rates should generally follow with no major movements. That’s good news for savers: Rates on CDs and high-yield savings accounts will likely continue to outpace inflation.

To a lesser extent, deposit rates are also influenced by the market expectations of future federal funds rates. This influence can be seen in the deposit rate changes that have occurred since September 2023.

In the last four months of 2023, markets were expecting at least one more federal funds rate hike, which ultimately didn’t happen. The effect on deposit rates was significant: The average online savings account rate increased 9.5 basis points, while the average online 1-year CD rate increased 25.0 basis points.

What is a basis point? A basis point is a common unit of measure for interest rates in finance — and the smallest. One basis point equals 1/100th of 1%, which is also expressed as 0.01% or 0.0001. As such, 100 basis points equals 1%. When the Fed changes the federal funds target rate, any increase or decrease is usually expressed in basis points. A rate increase of 75 basis points, for example, is equal to an increase of 0.75%, or three-quarters of a percent. What does inflation mean for interest rates? If the Federal Reserve determines that inflation is too high, it’ll attempt to slow the economy by raising the federal funds rate. Conversely, the Fed lowers rates to stimulate economic growth, with the aim of spurring on spending, borrowing and investing. Fed officials at the June meeting pointed out that they’ll need to gain “greater confidence that inflation is moving sustainably toward 2%” before reducing the federal funds rate. “So far this year, the data have not given us that greater confidence.” That data likely contributed to the dot plot change that reduced the forecasted rate cuts for 2024 and 2025. These changes may lead to some small deposit rate increases. However, a favorable May consumer price index (CPI) inflation report released just before the FOMC statement suggests that the Fed may not have had to lower the number of rate cuts in its projections. If future favorable inflation reports continue to contradict these latest Fed projections, deposit rate increases may not materialize. Deposit rates have generally ended their decline after a brief period when inflation began to cool in late 2023. In the first four months of 2024, the average online savings account rate dropped 8.5 basis points, while the average online 1-year CD rate tumbled 40.9 basis points. After a hotter-than-expected April CPI report, the average online savings account remained largely unchanged through spring, and the average online 1-year CD rate gained 2.5 basis points. Insights from Treasury yield changes FOMC policy decisions and signals from FOMC meetings can lead to changes in Treasury yields, and Treasury yield changes can influence CD rates. A review of Treasury yield changes from the May meeting to the June meeting offers insights into where CD rates are headed. Since the May FOMC meeting, the yields of Treasurys with maturities from one year to 10 years have fallen, with larger declines on longer terms. The yield declines ranged from 4 basis points for the one-year Treasury bill to 24 basis points for the 10-year Treasury note. Much of this decline was driven by a favorable CPI report for April. Those yield declines paused on June 7 after the release of the May jobs report that showed surprising gains in jobs and wages. The U.S. economy added 272,000 jobs in May, far more than expected. Even though the number of forecasted rate cuts dropped in the new SEP dot plot, the Treasury market appeared to focus more on the favorable May CPI report. The result was further decline of Treasury yields from June 11 to June 12. [Insert the following at the top of the blog post text box for the below table to be displayed properly in DA:] [Insert the following into DA’s text box to create a table to be displayed nicely in DA. Yields for June 11 and June 12 will be inserted on the 12th.] Changes in Treasury Yields Since Last Fed Meeting Date 3 months 1 year 2 years 5 years 10 years May 1 5.46% 5.21% 4.96% 4.64% 4.63% June 6 5.51% 5.08% 4.72% 4.29% 4.28% June 7 5.52% 5.17% 4.87% 4.46% 4.43% June 11 5.52% 5.17% 4.81% 4.41% 4.39% June 12 5.51% 5.13% 4.75% 4.32% 4.31% Source: Department of the Treasury’s Daily Treasury Par Yield Curve Rates Strategies for savers to maximize cash The ideal time to buy a CD used to be when long-term rates reached a peak and were about to fall — then, you’d lock into a long-term CD. However, today’s rate environment is different. Stubbornly high inflation has pushed the Fed to keep rates higher for longer, and savings account rates have stayed near their highs for this rate cycle. Several times in the first half of 2024, inflation failed to cool as the market had expected. Many banks were slow to respond, as they didn’t reverse the CD rate cuts of early 2024. Rising inflation could force the Fed to make additional rate hikes, which would pressure banks to raise CD rates. But the odds still favor cooling inflation, with eventual Fed rate cuts in the next six months. Still, because the future remains uncertain, hedging your bets on interest rates is best. You may want a mix of long- and short-term CDs and savings accounts. A CD ladder is another way of buying CDs without worrying about future interest rates. Look for CDs with mild early withdrawal penalties. If rates rise, you can always move your money into a higher-rate CD without too much cost from a penalty. What is the federal funds rate and its effect on deposit accounts? The federal funds rate is the key interest rate that banks charge each other for overnight loans. It’s a benchmark rate that influences how much you pay to borrow and how much you’re paid to save. A high federal funds rate results in high borrowing costs for consumers and businesses, and that tends to help reduce inflation. The higher loan rates banks are charging also encourages them to raise deposit rates, but a high federal funds rate doesn’t guarantee a high deposit rate. Other factors, such as competition and loan demand, can affect a bank’s decision on deposit rates. As a result, most banks set their deposit rates to only a small percentage of the federal funds rate. Online banks, however, typically offer rates on high-yield savings accounts and CDs that are much closer to the federal funds rate. What is the Federal Reserve meeting schedule? Here is the FOMC’s calendar of scheduled meetings for the rest of 2024 and early 2025. Note that meetings in September and December will include releases of the Summary of Economic Projections. Included with these dates are the odds that the federal funds rate target range will be lower than today’s target range. These odds are based on the Fed Funds futures market via the CME FedWatch Tool, as of June 12, 2024. FOMC Meeting Dates Meeting Odds of lower rate July 30-31, 2024 8.9% Sept. 17-18, 2024 63.5% Nov. 6-7, 2024 74.7% Dec. 17-18, 2024 92.7% Jan. 28-29, 2025 96.7%