Outlook for Higher CD Rates in 2017 is Promising

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Depositors have suffered with low CD rates going on about a decade now. Ever since the economy came out of the Great Recession, we eagerly awaited higher CD rates only to be rebuffed by the Fed. There has been one fed funds rate hike at the end of 2015 and another one last week.

With only two fed funds rate hikes in the past decade, it's no wonder deposit rates are still in the dumps. What does 2017 look like for CD rates? Will we only see one rate hike next year? Up until last week, the general consensus was there would be only one rate hike in 2017, which wasn't promising for higher CD rates in 2017.

That's changed since the Fed announced they anticipate increasing the federal funds rate another 0.75 percent in 2017 and will increase it more if needed. Last Friday, Richmond Fed President Jeffrey Lacker said it is likely more than three rate hikes will be needed in 2017.

The catalyst for internet rates to move even higher will be whether or not the Trump Administration is able to get Congress to approve any fiscal stimulus in 2017. The Obama Administration tried for several years to get Congress to approve fiscal stimulus in the form of infrastructure spending but Congress wouldn't budge.

Three rate hikes would put the fed funds rate around 1.50 percent, which will likely put the best 1 year CD rates around 2.00 percent. More than three rate hikes in 2017 would send 1 year CD rates even higher, possibly in the 2.60 percent rate range. The best 1 year CD rates available right now in our database are around 1.35 percent.

Looking beyond 2017, CD rates are expected to move even higher, thanks to a higher fed fund rate. Looking at the Fed's own forecasts for the fed funds rate we see the Fed expects the rate to be at 2.10 percent at the end of 2018. By the end of 2019, the fed expects the rate to be at 2.90 percent.

A 3.00 percent fed funds rate would likely put 1 year CD rates near 4.00 percent. The last time we saw 1 year CD rates at or above 4.00 percent was during the financial crisis when some banks were desperate to raise deposits.

On August 23, 2008, we did a post about a 5.0 percent 13 month CD rate Washington Mutual was offering. You can read about it: Washington Mutual 5.0% APY 13 Month CD. A 5.00 percent 13 month CD rate didn't save Washington Mutual.

For those who don't remember what happened to Washington Mutual, the bank was placed into receivership about a month later on September 25, 2008 by the FDIC.

These interest rate projections are long term projections that can and will change. The Fed increased their projections for the fed funds rate by 1/4 percent between their October and December meetings. The next Fed meeting is scheduled for January 31 to February 1 but they won't be releasing economic projections during that meeting.

The next set of projections will be released during their mid-March meeting. You can view the Fed's meeting calendar for 2017. Depending on what the economy does over the next couple of months and whether any stimulus goes into effect will determine if the projections are raised again.

After 10 years of painfully low interest rates on deposit products, savers finally have something to look forward to in the coming years. The question isn't whether or not CD rates will increase but by how much.

Author: Brian McKay
December 19th, 2016