FOMC Meets this Week to Decide Direction of Policy – are CD Rates Headed Higher?
The Federal Open Market Committee will meet today and tomorrow to decide the direction of monetary policy. There probably won't be any policy changes from the current accommodating stance of providing stimulus to the economy. What we will be looking out for are the FOMC's comments about future growth and if those predictions have moved higher since the last meeting. Stronger growth will eventually lead to the FOMC pulling back on stimulus, with includes a higher Federal funds rate which will lead to higher CD rates.
We have reason to believe the Fed will increase their predictions for growth as a lot of positive economic data has been released in 2013. The housing market is gaining steam as stronger housing sales and higher home prices have helped the economy grow. Stronger retail sales and higher consumer sentiment will also help the economy.
The last piece in the puzzle that will lead to bank CD rates and savings rates moving higher is a lower unemployment rate. The Fed has stated that they plan to keep the fed funds rate near zero percent until the unemployment rate falls below 6.5 percent. The current rate is at 7.7 percent so we have some way to go before we get down to 6.5 percent.
The Fed believes the rate will fall that low by the end of 2015 but we believe it will happen sooner. For the first time in three years, it finally looks like the economy is gaining momentum. Growth started out strong each year for the past three but dropped off as the year progressed. This year looks different as economic data has been consistently strong.
We believe the Fed will be forced to start increasing the fed funds rate sometime next year. With the current rate just above zero percent, the Fed will have to increase the rate at least 2 percent in order to have a more "neutral stance" on policy. We also believe the increase will be rather quick and possibly in 0.50 percent or even 1.00 percent increments.
If the Fed does increase the rate in a range between 2.00 and 3.00 percent, average CD rates on 1 year certificates of deposit will also move to that range. Right now the best CD rates on 1 year certificates of deposit are at 1.00 percent, so a 2.00 percent rate will be a big increase. Currently, the highest CD rates on 6 month certificates of deposit are at 0.89 percent. Some time in 2014, 6 month rates will move to the 1.50 to 2.00 percent range.
After 5 years of CD rates moving lower, getting back into a cycle when rates are moving higher will be welcomed by many. You should stay invested in shorter term CD accounts of 1 year or less so you can take advantage of higher rates sooner than later.