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European Central Bank Announces QE, Sends U.S. Interest Rates Soaring

The European Central Bank (ECB) just announced their first round of quantitative easing. The ECB will buy $70 billion a month of private and public bonds to help stimulate economic growth in the European Union. Before the news broke, even the possibility of easing by the Europeans sent U.S. bond yields and equity markets soaring this morning. 10 year bond yields jumped 13 basis points to 1.93 percent this morning and Dow futures are up 123 points.

Whether or not the gains in bond yields lasts remains to be seen. Where interest rates in the United States end up for the rest of 2015 and beyond depends on U.S. economic growth and the Federal Reserve increasing the federal funds rate. At this point, the Fed is still expected to increase the federal funds rate in a few months.

A higher fed funds rate is good news for depositors because once the fed funds rate is increased, CD rates and other bank rates will also move higher. Currently the best CD rates on the 1 year certificate of deposit rate list are at 1.16 percent with an APY of 1.17 percent.

2015 is finally the year we will see higher CD rates, after at least a half dozen years of low rates. If the fed funds rate is increased this year, chances are there will be more than one increase. If there is a series of increases,the fed funds rate could be around 0.75 percent to 1.00 percent by the end of the year.

A 1.00 percent fed funds rate would send 1 year CD rates towards 2.00 percent. Variable interest rate accounts will also see rates move towards 2.00 percent.  The last time 1 year CD rates, savings rates or money market rates were around 2.00 percent was several years ago.
Author: Brian McKay
January 22nd, 2015