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Fed no Longer Patient on Interest Rates – Higher CD Rates Coming

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As expected, the Federal Reserve Open Market Committee (FOMC) dropped the word "patient" in their interest rate guidance. This doesn't mean a hike in the federal funds rate is happening right away, but removing patient takes us one step closer to an increase.

The last time the federal funds rate was increased was almost a decade ago (June 2006), when the rate was increased 0.25 percent to 5.50 percent. It's also been a very long time since we have seen 1 year CD rates at 5.00 percent. In fact, the last time we saw CD rates that high was during the financial crisis when Washington Mutual 1 year rates were 5.00 percent. You can read this post from August 2008: Whoo-Hoo - 1 Year CD Rate at 5.00 Percent

The next FOMC meeting is scheduled for late April and the meeting after that is in mid-June. It's highly unlikely that an increase will come in the April meeting. Based on Federal Reserve forecasts, it's also less likely the increase will happen in the June meeting. An increase in June isn't out of the question, we still believe there will be a token 25 basis point increase in June.

Fed participants have also lowered their forecasts on where the fed funds rate will be at the end of 2015, 2016, and 2017. Projection materials released right after the December 2014 meeting, showed forecasts as high as 1.875 percent by the end of 2015. Year-end forecasts were lowered to 1.625 percent in this week's meeting projection.

The median forecasts were also lowered to 0.625 percent for the end of 2015, compared with 1.125 percent in December's forecast. Forecasts for 2016 and 2017 were also lowered. You can compare the Fed's December 2014 projections and March 2015 projections.

Make no mistake, higher CD rates are on the way starting this year. Nobody knows for sure when rates wil increase and how high will rates go. Instead of guessing exactly when CD rates will increase, we have forecast where 1 year CD rates will be based on the Fed's forecast for the fed funds rate.

The median forecast for the fed funds rate at 0.625 percent by the end of 2015 would send the best 1 year CD rates towards 1.75 percent. The high end forecast for the fed funds rate at 1.625 percent would send the top 1 year rates as high as 2.75 percent. 1 year rates just below 3.00 percent will be welcome news, especially for retirees relying on interest income.

The best CD rates on 1 year certificates of deposit right now are well below 3.00. This week's top 1 year rate is at 1.30 percent with an APY of 1.31 percent. You can search for and compare rates on our rate tables: CD Rates - Compare the Best CD Rates at Banks.


Author: Brian McKay
March 19th, 2015