No Relief for Savers as FOMC Declines Rate Hike

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The Fed declined to raise the fed funds rate this past week, which isn't good news for savers. CD rates will stay near current levels until the Fed increases the rate. The Fed did say at least one rate hike was likely in 2016 so a hike should be in the near future. 

There are two Fed meetings left in 2016, one just before the election in November and another meeting in December. A rate hike just before the presidential election is unlikely but not unprecedented. Whichever month is chosen, the hike will only be 25 basis points.

This will mean only a slight increase for short and intermediate term CD rates. Banks won't change long-term CD rates at all since long-term bond yields won't rise at all with a rate hike. In fact, the yield curve is flatting and will likely flatten more with a rate hike.

The yield curve is the difference between short term and long term bond yields. As the Fed increases the fed funds rate, short-term bond yields rise closer to long-term bond yields, thus flatting the yield curve.

Last year at this time, the rate difference between 1 year (0.34%) and 10 year (2.16%) U.S. bond yields was 1.82 percent. On Friday, 1 year yields were at 0.60 percent and 10 year yields were at 1.62 percent, a difference of a mere 0.98 percent. 

If we do see a rate hike in 2016, the increase of 25 basis points will put the fed funds rate in a range of 0.50 percent to 0.75 percent. The top short and intermediate term CD rates will increase but probably not by 25 basis points.

Right now the best 1 year CD rates available in our database of rates are at 1.29 percent with a yield of 1.30 percent. With a Fed rate hike, the highest 1 year rates will likely move between 1.35 percent and 1.40 percent. We might even see a 1.50 percent 1 year CD rate.

Author: Brian McKay
September 25th, 2016