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A Stronger Economy Will Lead to Higher CD Rates Before the End of 2015

A Stronger Economy Will Lead to Higher CD Rates Before the End of 2015The Federal Reserve plans to keep the feds funds rate near zero percent until the unemployment rate falls below 6.5 percent, which the fed believes will happen at the end of 2015. An extremely low fed funds rate will keep CD rates and all interest rates very low. We just moved closer to the possibility of the unemployment rate falling below 6.5 percent before the end of 2015.

The February 2013 jobs report came out showing the unemployment rate unexpectedly falling to 7.7 percent, down from the prior month's rate of 7.9 percent because more jobs were created than analysts expected. Private sector payrolls increased 246,000 in February and government payroll jobs fell 10,000, leading to a net gain of 236,000 for the month.

The rate at which jobs were created was a lot stronger than what economists had predicted. Economists believed there would be a net gain of 160,000 jobs. This is all very positive news for the economy in a slew of positive reports released recently. A number of positive housing reports also points to an improving economy and higher interest rates before the end of 2015.

This is welcome news for holders of interest bearing assets like certificates of deposit who have been suffering with record low bank CD rates for the past several years. The best CD rates on both long term and short term certificates of deposit are low because of the fed's policies which are designed to force all interest rates lower to spur growth.

The highest CD rates on 5 year certificates of deposit are at 1.75 percent and the highest CD rates on 1 year certificates of deposit are at 1.05 percent. Only a 70 basis point difference between 1 year and 5 year rates. This is one of the lowest points historically speaking that the rate difference has been that narrow.

Bond yields will be a leading indicator on when the Fed will increase the fed funds rate which will lead to higher bank rates. In anticipation of a higher fed funds rate, market forces will send bond yields higher. A really sharp increase in bond yields will force the fed to increase rates before the unemployment rate falls below 6.5 percent.

It remains to be seen what the unemployment rate will be in the coming months, one thing is for sure, don't count on government jobs to lower the unemployment rate. Monthly government job creation has been negative every month and will continue to be negative for 2013 as sequestration hits. In past recoveries the Federal and State governments contributed to job creation, this recovery has been slower because of the loss of government jobs.
Author: Jason P. Jones
March 8th, 2013