94.4% Probablity of a Rate Hike Will Send Bank CD Rates Higher

Bank CD rates will increase in the coming weeks and will make new highs for 2018. The reason for higher CD rates in the coming weeks is because of a higher fed funds rate. The Federal Reserve is meeting today and tomorrow and is widely expected to increase the fed funds rate by 25 basis points.

In fact, it's a foregone conclusion that a 0.25 percent rate hike is coming according to market probabilities. The CME Group's FedWatch Tool puts the likelihood of an increase this week at 94.4 percent. One of the highest probabilities I recall ever seeing with the FedWatch Tool.

Bank CD Rates Forecast Higher

Although a 0.25 percent hike is coming for the fed funds rate, don't expect banks to increase deposit rates by 0.25 percent, not initially anyway. Banks will be quick to increase loan rates by 25 basis points, in lock-step with the fed funds rate, but not on deposit rates. This is standard practice and is how banks traditionally made money. This is also how banks achieve higher profit margins in higher-rate economic environments.

What is likely to occur is the best deposit rates will move about 10 to 15 basis points higher. The best CD rates on 1 year certificates of deposit, currently at 2.15 percent, will increase to 2.25 percent to 2.30 percent. The top 6 month CD rates currently at 1.95 percent will increase to 2.05 percent to 2.10 percent. The highest 3 month CD rates will increase to 1.55 percent to 1.60 percent. These top CD rates are available online, most brick and mortar bank CD rates are well below these rates.

CD rates have been on an uptrend for about two years now and will continue moving higher for the rest of 2017. The FOMC is expected to increase the fed funds rate at least two more times this year and possibly more. Two more rate increases will send short term CD rates up at least another 25 to 30 basis points.

The key to more than two rate increases is higher inflation. The Fed has a target of a 2.00 percent inflation rate. If the Fed expects inflation to increase higher than their target rate, that will trigger the Fed to increase the rate more than two times.