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Fed Official Says Interest Rates Should Rise in the First Quarter of 2015

Any deposit rate increase we may see is dependent on when the Federal Reserve increases the federal funds rate. The general consensus for a higher fed funds rate has been sometime next year, most likely in the second half of 2015. There is hope that the Federal Reserve will increase the federal funds rate sooner, according to recent comments by St. Louis Fed President James Bullard.

In an interview with Fox Business Network, Fed President James Bullard commented that interest rate increases should come sooner than later. Bullard said the U.S. unemployment rate will fall below 6 percent and inflation will likely rise to 2 percent later this year, putting the economy closer to "normal" sooner than most people realize.




Bullard, who is a non-voting member of the Fed, said the following:
You are basically going to be near normal on both dimensions basically later this year, that's shocking, and I don't think markets, and I'm not sure policymakers, have really digested that that's where we are.

If Bullard is correct, the first increase in the fed funds rate would be increased 3 to 6 months sooner than expected. In the Fed's most recent economic projections released in June, forecasts by committee members has the fed funds rate anywhere between 0.25 percent and 3.00 percent. The majority of committee members have forecast the fed funds rate to be between 1.00 percent and 1.25 percent by the end of 2015.

Regardless of when interest rates move higher or by how much rates are moving higher next year, a federal funds rate of 1.00 percent would send 1 year CD rates to the 2.00 percent range. Savings rates and money market rates would also move as high as 2.00 percent. A fed funds rate of 3.00 percent would send 1 year CD rates, savings rates, and money market rates all above 3.00 percent.

Historically speaking, interest rates in the 2.00 percent to 3.00 percent range aren't great. Compare these rates with where rates have been the past 5 years and things start to look better. Right now, the best CD rates on 1 year certificates of deposit are around 1.10 percent to 1.20 percent. The best savings rates and money market rates are around 1.00 percent.

Since rates are moving higher in the coming years, one smart move is to stay invested in either variable rate accounts or short term fixed rate accounts. Invest in certificates of deposit with terms of 12 months or less so you can roll your accounts into higher rate accounts when interest rates move higher next year.
 
Author: Brian McKay
June 29th, 2014