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Higher Federal Funds Rate Likely in the Spring of 2015, Leading to Higher CD Rates

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The Federal Reserve's new Chairperson, Janet Yellen, indicated that the federal funds rate might be increased sooner than expected. In Janet Yellen's first press conference she hinted at a possible need to increase the fed funds rate about six months after the fed stops their stimulus program of buying bonds and mortgage-backed securities.

If Yellen's forecast is right, we can expect a higher fed funds and higher CD rates in the spring of 2015 instead of the current forecast of the summer of 2015. Stronger growth and lower unemployment looks likely for the rest of 2014 so an increase in interest rates is quite possible.

In the most recent Federal Open Market Committee meeting, the FOMC decided to ratchet down their monthly purchases of long term bonds and mortgage-backed securities another $10 billion a month, down to $55 billion. Since the beginning of 2014, the Fed has reduced their buys from $85 billion a month to $55 billion.

By the end of this year, the Fed will probably cease their purchases of mortgage-backed securities and long term bonds. Interest rates on long term bonds and mortgage rates will move higher once the downward pressure is eased but the same can't be said for deposit rates. CD rates, savings rates, and money market account rates are tied directly to the fed funds rate and rates won't move higher until the fed funds rate is increased.

The current fed funds rate is near zero percent but will hopefully be increased in about a year since the unemployment rate is falling and growth is picking up. The Fed's forecasts on growth and the unemployment rate are also looking better since the last FOMC meeting in December.

In the December meeting, the unemployment rate was forecast to be at 6.3 percent by the end of 2014. In March's meeting, the forecast for the unemployment rate was lowered to 6.1 percent by the end of the year. Forecasts for GDP growth in 2014 are now between 2.8 percent and 3.00 percent.

All of this is positive news for certificate of deposit account holders who have received rather pitiful returns for many years now. One more point to make - stay invested in shorter term certificates of deposit or variable interest rate accounts so you can take advantage of higher rates when they come.

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Author: Brian McKay
March 25th, 2014