CD Rates Will Move Higher in 2014
For over 5 years now we have been living with the lowest CD rates available in generations. Ever since the financial crisis and Great Recession, the Federal Reserve has forced interest rates down to record lows. Deposit rates, bond rates, and mortgage rates have all hit record lows at some point during the past year.
The good news is that the era of low interest rates will be coming to an end during the second half of 2014. This is good news for those who rely on interest income, but bad news for buyers who are financing the purchase of a home. We have already seen mortgage rates move higher because rates are tied to long term bond yields which have moved sharply higher over the past several months. Deposit rates are not tied to bond yields which is why rates haven't moved up at all.
CD Rates Tied to Federal Funds Rate
CD rates and all deposit rates are tied to the federal funds rate. The current rate has been at a record low of zero percent to one quarter percent for almost 5 years now. The Federal Reserve lowered the federal funds rate to zero percent back in December 2008. Unfortunately, economic growth hasn't been strong enough and the unemployment rate hasn't been low enough for the Fed to increase the rate.
The Fed has said over the past year that they will increase the fed funds rate once the unemployment rate falls below 6.5 percent. The current rate is at 7.2 percent, only 0.7 percent above the point the Fed says they will increase the fed funds rate. The unemployment rate has been falling on average 0.1 percent a month the past year.
This means the unemployment rate will probably hit 6.5 percent in April 2014. The Federal Open Market Committee (FOMC) is set to meet at the end of April 2014, before the April unemployment report is released. The following meeting will be at the end of June 2014, which means the Fed will probably increase the fed funds rate at that point.
Banks Will Increase Deposit Rates in Q3 2014
A higher fed funds rate in May or June of 2014 will mean higher deposit rates soon after. The likely scenario will be that the Fed will vote to increase the fed funds rate in the June 2014 meeting and banks will increase deposit rates in July of 2014. Current 1 year CD rates at banks on average are at 0.75 percent and the best CD rates on 1 year CD accounts are at 1.04 percent.
By next July, 1 year CD rates will probably average about 1.25 percent and the highest 1 year rates available will probably be around 1.50 percent. After the Fed's July meeting, they are scheduled to meet 3 more times in 2014. If the unemployment rate continues to fall in 2014 and GDP growth picks up, the Fed will continuing increasing the fed funds rate.
By the end of 2014, the fed funds rate will probably be between 2.00 percent and 2.50 percent. 1 year CD rates at banks on average will be around 2.75 percent and the best 1 year rates will be above 3.00 percent. If growth is stronger during the second half of 2014, rates will be even higher.
Stay Invested in Shorter Term Certificates of Deposit
Interest rates are headed higher for the foreseeable future. The last thing you want to do right now or over the next couple of years is to lock into a long term CD account with a low rate. Stay invested in CD accounts of 6 months or less right now so when rates finally do increase you're able to get higher rates sooner than later.
The highest 6 month CD rates in our rate database right now are from Zions Direct at 1.00 percent. This bank's 6 month rate is better than most 12 month rates available. Another option besides investing in short term CD accounts is staying liquid in a savings account or money market account.
The best savings rates available right now are also at 1.00 percent and the best money market rates are at 0.90 percent. Remember these types of accounts are variable rate accounts, unlike locking in a CD rate.