Fed Will Push Top 1 Year CD Rates Above 1.50%

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CD rates continue to inch higher this month as the top 1 year CD rate on our rate list increased from 1.35% to 1.40%. We might see the best 1 year CD rates move above 1.50 percent in the coming week if the Fed increases the fed funds rate. Recent comments by the Fed officials pretty much guarantee a rate hike. 

Last week, the Fed shifted the market's expectations of a rate hike in March from around 30 percent to 80 percent. The Federal Reserve Chairwoman, Janet Yellen said in a speech entitled, "From Adding Accommodation to Scaling It Back," that "further adjustment of the federal funds rate would likely be appropriate."

Besides the Chairwoman's comment, the Vice Chairman, Stanley Fischer, said around the same time, “We’ve seen a lot of substantial change in a relatively short time, there is almost no economic indicator that has come in badly in the last three months.”

Fischer was asked if there was a coordinated effort to get a message out about a rate hike and Fischer said, “If there has been a conscious effort, I’m about to join it.” Comments from both Fed officials are unusually blunt about a coming rate hike.

The Fed also hinted at more rate hikes coming in 2017. Yellen's speech hinted at a total of three 0.25% hikes in 2017 by saying, "a cumulative 3/4 percentage point increase in the target range for the federal funds rate would likely be appropriate over the course of this year."

Three rate hikes in 2017 would put the fed funds rate in a range of 1.25 percent to 1.50 percent. The fed funds rate at 1.50 percent would sent 1 year CD rates above 2.00 percent for the first time in about a half dozen years.

Looking beyond 2017, Yellen also said there will likely be a need to increase rates in 2018 and 2019, "partly because my colleagues and I expect the neutral real federal funds rate to rise somewhat over the longer run, we projected additional gradual rate hikes in 2018 and 2019."

Additional rate hikes in 2018 and 2019 will send deposit rates even higher.

As of this afternoon, the CME Group FedWatch Tool puts the probability of a rate hike next week at 86.4 percent.

Author: Brian McKay
March 8th, 2017