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Outlook for CD Rates in 2015 is Promising

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The outlook for CD rates in 2015 is very promising, which is great news since rates have been dismal for the past 6 years. In fact, the return on CDs hasn't even kept up with the inflation rate for the past several years. Investing in FDIC insured certificates of deposit will never give you the best rate of return, but at least your principal is safe.

[caption id="attachment_86614" align="alignright" width="441"]Timing of Fed Funds Rate Increase Source: federalreserve.gov[/caption]



This coming year CD rates will be moving higher because the Federal Open Market Committee (FOMC) is set to increase the federal funds rate. Bank rates, including CD Rates, are tied to the fed funds rate.

Once the rate is increased, bank rates also move higher. Forecasts for how high the fed funds rate will increase are all over the map but one thing is certain, the rate will be increased in 2015.

The most recent set of forecasts released by the FOMC were this past September. 14 of the 16 FOMC participants believe the fed funds rate will be increased sometime in 2015.

The range of forecasts in 2015 is as low as 0.125 percent and as high as 2.875 percent. The majority of forecasts are between 0.87 percent and 1.875 percent. You can view all the FOMC's forecasts on their website: FOMC Economic Projections.

A fed funds rate at 1.875 percent would send the highest 1 year CD rates towards 3.00 percent. Some banks may offer 1 year rates just above 3.00 percent. The fed funds rate at the highest projection of 2.875 percent would send 1 year bank CD rates towards 4.00 percent. The last time 1 year CD rates were near or above 4.00 percent was just before the financial crisis in 2007.

[caption id="attachment_86615" align="alignleft" width="447"]Source: federalreserve.gov Source: federalreserve.gov[/caption]

The outlook for CD rates in 2016 and 2017 is even brighter because the FOMC has projected an even higher fed funds rate. The lowest projection for the fed funds rate in 2016 is at 0.375 percent with the highest projection is at 4.00 percent.

The vast majority of projections are between 2.875 percent and 4.00 percent. If the rate was increased to 4.00 percent, 1 year CD rates would be above 5.00 percent.

Looking into fed funds rate projections for 2017, the low point is a 2.00 percent rate and the high point is at 4.375 percent. The majority of forecasts are for the rate to be between 3.75 percent and 4.375 percent. The fed funds rate at 4.375 percent would send 1 year CD rates to around 5.50 percent. Some financial institutions might even increase 1 year rates to around 6.00 percent.

Naturally, any of the fed funds rate projections and our corresponding CD rate projections are dependent on the economy. Another recession would keep CD rates near current levels. On the other hand, stronger than expected inflation would send rates even higher.

We don't know how high interest rates will be going in the coming years but we do know rates are moving up. If you're investing in certificates of deposit, you should stick to shorter term CDs so you can take advantage of higher rates when they become available.
 
Author: Brian McKay
November 11th, 2014