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Mortgage Rates Increase, When Will CD Rates Move Higher?

The past month we have seen mortgage rates on a tear, moving higher week after week while average CD rates are still stuck at record lows. The past week's average mortgage rates on both 30 year and 15 year loans were up almost 30 basis points each. Rates on home loans are moving higher because they are tied to long term bond yields, which have also gone considerably higher the past month.

Bank CD rates and all deposit haven't moved higher this past month only because they have nothing to do with bond yields. Granted, deposit rates and bond yields usually move higher or lower in tandem but until the Federal Reserve increases their key interest rate, deposit rates will remain low.

Deposit Rates and Federal Funds Rate

Deposit rates are tied to the federal funds rate. The current fed funds rate is in a targeted range of zero percent to one quarter percent. This is where the rate has been since December 2008, when the Fed lower it to help us recover from the financial crisis and Great Recession. You have to go back almost 7 years to see the last time the Fed increased the fed funds rate.

Back on June 29, 2006, the fed funds rate was increased from 5.00 percent to 5.25 percent. During that time many banks were offering 1 year CD rates in the 5.00 percent to 6.00 percent range. These days the best CD rates on 1 year certificates of deposit are just above 1.00 percent. Long term CD rates at banks are also low - the highest CD rates on 5 year CD accounts are under 2.00 percent.

Unemployment Rate for May

Deposit interest rates will probably move higher over the next 12 months. We will have a clearer picture this Friday when May's unemployment report is released. The Fed has stated that they will increase the Fed funds rate when the unemployment rate falls below 6.5 percent. The unemployment rate was 7.5 percent in April's report.

If there is a drop in the unemployment rate it will be small, as the maximum decline will probably be 0.1 percent or 0.2 percent but nonetheless it will put the rate closer to 6.5 percent, at which point the Fed will increase their key interest rate. The unemployment rate has declined 0.1 percent on average each month in 2013.

Higher CD Rates in Summer 2014

If the unemployment rate continues to fall 0.1 percent a month, we will hit the magical 6.5 percent in the second quarter of 2014. The Federal Open Market Committee (FOMC) is scheduled to meet twice in Q2 2014, in April and then again in June. Since the Fed's current policy stance is so accommodating for growth, the Fed will have to increase rates quickly to have a more neutral policy stance.

A more neutral stance for the fed funds rate, in that it neither spurs growth nor forces a growth slowdown, is probably around 1.50 percent to 2.00 percent. By the summer of 2014, we could quickly see 1 year CD interest rates move to the 2.00 percent to 2.50 percent range. A sharp increase from current levels are welcome news for depositors.

Compare CD rates from many different banks by using our rate tables at

Author: Brian McKay
June 5th, 2013