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CD Rates Hold Steady as Fed Sets Stage for September Rate Hike

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The Federal Open Market Committee (FOMC) held their two day meeting this week and decided not to hike interest rates. While is this good news if you're financing the purchase of a home, or refinancing a mortgage, it's not so good if you're looking for an increase in CD rates and other deposit rates.

The general consensus for a rate hike is now during the September FOMC meeting, but that isn't a done deal either. Federal Reserve Chair Janet Yellen, in a press conference after the meeting, was reluctant to give a specific date for a hike. Yellen said and interest rate increase would continue to be discussed "on a meeting-by-meeting basis, depending on [the FOMC's] assessment of incoming economic information and its implications for the economic outlook."

You can read the press conference transcript or view the entire press conference in the video below:

Yellen said "too much attention is placed on the timing of the first increase in the federal funds rate." I agree with this statement, I believe the Fed should have done a token increase of 0.25 percent just to get beyond the markets fixation with the first increase.

The fed funds rate is still being held in a record low range of zero percent to one quarter percent. A 25 basis point increase would do nothing to constrict growth, in fact the fed funds rate at 1.00 percent would still be very accommodating for growth.

September Rate Hike? How About July?

Everyone is talking about September being the lift-off date for an increase in rates. The FOMC is also scheduled to meet in July, could we see the first hike next month? A July increase would only happen if very strong economic data is released the next month, not likely in this choppy recovery the past 5 years.

CD Rates Slowly Move Higher in 2015

CD rates have been slowly inching higher this year without an increase in the fed funds rate. At the beginning of 2015, the best CD rates on 1 year certificate of deposit were at 1.14 percent with an APY of 1.15 percent. The highest 1 year rates this week are at 1.24 percent with an APY of 1.25 percent. Two banks, Synchrony Bank and CIT Bank, are both offering that rate and yield this week.

The best 2 year CD rate in early January was at 1.39 percent with an APY of 1.40 percent. The best 2 year CD rate this week is 10 basis points higher at 1.49 percent with an APY of 1.50 percent. These increases the past 6 months have been small but at least rates are headed higher.

The increase in rates will accelerate when the fed funds rate is increased. When the Fed finally increases the rate it will most likely be a 25 basis point increase. This increase will send the highest rates up by an equal amount. By September, we could see the best 1 year CD rates at 1.50 percent, a level we haven't seen many years.

FOMC Forecasts Federal Funds Rate at 0.625 Percent at the End of 2015

The FOMC also released economic forecasts this month and where they believe the fed funds rate will be. The FOMC cut forecasts for both this month. Most of the forecasts for the fed funds rate are clustered around 0.625 percent. The range varies from 0.125 percent to 0.875 percent. You can view all forecasts for the fed funds rate below.










Different Scenarios for CD Rates Based on FOMC Forecasts

If the fed funds rate is at 0.125 percent, which means there won't be a hike in 2015, 1 year CD rates might increase towards 1.30 to 1.35 percent.

If the fed funds rate is increased to 0.625 percent by December 2015, 1 year CD rates will be between 1.75 percent and 2.00 percent.

A rate to 0.875 percent by the end of the year, would send 1 year rates above 2.00 percent and possibly as high as 2.50 percent.

Any increase will be welcome news for deposit rates, the last time the fed funds rate was increased was almost 10 years ago. We have dealt with the lowest deposit rates in generations and many retirees who rely on interest income, have been hurt by low rates.
Author: Brian McKay
June 19th, 2015