Higher CD Rates This Month Will Depend on The Fed

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Short term CD rates slowly crept higher this year because of the Fed's two fed funds rate hikes the past 6 months. The best 1 year CD rates increased from around 1.25 percent early in 2017 to around 1.50 percent today. The best 6 month rates increased from around 0.85 percent to 1.15 percent.

Fed funds rate hikes have been rare the past decade. The last time the Fed increased the rate twice in a row was more than a decade ago back in 2006. This dearth of rate hikes sent CD rates to record lows but the outlook for the future is more promising.

Higher CD rates this month will depend on what the Fed does during next week's meeting. The Fed has already telegraphed two more rate hikes are likely in 2017. The question is when they will increase.

Despite the weak employment report released last Friday, the Fed is still widely expected to increase the fed funds rate next month. The CME Group's FedWatch Tool, a market measure of rate hikes, puts the probability of a rate hike at 91.2 percent.

Higher CD Rates This Month

A 25 basis point fed funds rate hike would put the rate in a range of 1.00 percent to 1.25 percent. The last time the rate was in a range of 1.00 percent to 1.25 percent was in October 2008, during the financial crisis. An increase will entice online banks with the top CD rates to increase rates even more.

This increase will put the top 1 year CD rates over 1.50 percent and likely closer to 1.75 percent. 6 month CD rates will move above 1.25 percent and possibly as high as 1.35 percent.

Online banks will increase their rate but we don't expect the big brick and mortar banks to do so. The big banks are not interested in raising deposits which is why their 1 year CD rates are at a measly 0.05 percent.

CD Rates are Moving Higher Quicker Than Expected

We anticipated rates moving higher in 2017 and beyond solely because the Fed has forecast a higher fed funds rate. Back in December 2016, we posted an article "Outlook for Higher CD Rates in 2017 is Promising." The good news is CD rates are moving even higher than we expected.

In the article, we forecast 1 year CD rates would increase to around 2.00 percent with three fed fund rate hikes. 1 year CD rates are already at 1.50 percent which just one hike in 2017. Two more hikes will put 1 year CD rates around 2.25 percent.

Looking beyond 2017, the Fed has forecast an even higher fed funds rate. If the Fed's forecast is correct, 1 year CD rates will move in the 3.00 percent range in 2018 and the 4.00 percent range in 2019. The last time CD rates were that high was just before the financial crisis.

Author: Brian McKay
June 6th, 2017