Interest Rates Rise as Unemployment Rate Increases to 7.3%; 204,000 Jobs Added
When Will the Federal Reserve Taper?
The strong report sent 10 year bond rates to 2.75 percent this morning, 0.14 percent higher than yesterday's close. The bond market is reacting to the unemployment numbers wondering if the Federal Reserve will start tapering their bond and mortgage backed securities (MBS) purchases sooner than thought.
Check on Current CD Rates Here: Best CD Rates
Late last month the Fed announced they would continue their purchases, and the markets believed the Fed wouldn't start tapering until the first or second quarter of 2014. Now all bets are off as to when the Fed will taper. The bad news is higher bond rates will send mortgage rates higher.
CD Rates and Mortgage Rates Will Increase
The good news is if the economy is growing stronger than expected, we could see higher CD rates and deposit rates sooner than expected. Stronger growth will mean more jobs, a lower unemployment rate, and eventually higher bank rates. The Fed has made it clear they will increase their key benchmark interest rate, the fed funds rate, when the unemployment rate falls below 6.5 percent.
The current fed funds rate is in a targeted range of zero percent to one quarter percent. With an unemployment rate just 0.8 percent higher than the Fed's target, we could see a 6.5 percent rate by late spring 2014. When the rate falls to that level, the Fed will be quick to increase the fed funds rate since the current rate is very accommodating for growth.
Federal Funds Rate Going Higher in 2014
Just to get to a neutral level in the fed funds rate, the Fed will have to increase it to the 3 percent range. When you're starting out at zero percent, getting to 3 percent will have to happen quickly. The Fed usually decides to increase interest rates when they meet. The Fed is scheduled to meet 5 times between June and December 2014.
If the unemployment rate falls below 6.5 percent by late spring as we predict, the Fed will then increase the fed funds rate 0.50 to 1.00 percent in June 2014. That would be the first increase in the federal funds rate since June 2006 when the rate was increased 0.25 percent to 5.25 percent. By the end of 2014 the federal funds rate will be near 3 percent.
You can view historical changes to the federal funds rate here: Historical Fed Funds Rate
CD Rates Will Be Much Higher by the End of 2014
CD rates, savings rates, and all deposit rates are directly tied to the fed funds rate. When the fed funds rate is increased to 3 percent, 1 year CD rates will increase to 3.50 percent to 4.00 percent. Savings rates and money market rates will also increase in the 3.50 percent to 4.00 percent range.
If you have a certificate of deposit maturing over the next year, you should either reinvest in short term CD accounts or in a variable interest rate account. It makes no sense to lock into a long term CD when rates are rising. Do that at the end of a cycle that brings higher rates.
Say Goodbye to Record Low Mortgage Rates
Even before the Fed increases the fed funds rate, mortgage rates will move higher. We have already seen this happen over the summer. Mortgage rates increased over 100 basis points in just over a month in the early summer, killing refinance demand. Higher mortgage rates have also cooled the housing recovery.
In the Mortgage Bankers Association's Weekly Applications Survey, demand for loans for home purchases declined 5 percent to the lowest level since December 2012. The refinance index, which measures loan demand for homeowners refinancing loans, declined 8 percent.
We believed 30 year mortgages would remain below 4.50 percent for the rest of 2013 but there is a chance now rates might move above that range. The surprisingly strong October unemployment report might change our forecast but we're inclined to wait and see the economic data coming out in the next couple of weeks.