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The Probability of a Fed Funds Rate Hike Increases Again

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Any large increases in CD rates and other deposit rates depend on when the Federal Reserve increases the federal funds rate. The Fed's current target range for the fed funds rate is between zero percent and one quarter percent. Market expectations are that the Fed will increase the fed funds rate sometime in 2015. The question remains when will a rate hike occur in 2015.

The CME Group's FedWatch tool allows you to quickly see the market’s expectations for when the Fed funds rate will likely be increased. Over the past several months, the expectation of the Fed increasing the rate has gone up. What is means for CD rates is, it is getting more likely rates will move higher sooner than later in 2015.

The probability of a fed rate hike increases throughout 2015 with the highest probability of a rate hike being in December 2015. The first two Fed meetings scheduled for 2015 are in January and March. The tool predicts only a 1 percent change of a rate hike in the Jan meeting and a 4 percent hike in the March meeting.

For the first 5 months of 2015, it's likely that CD rates, savings rates, and money market rates will remain near current levels. Average 1 year CD rates are at 0.99 percent this week and the highest 1 year CD rate on the rate table is at 1.17 percent. The highest savings rates currently available are at 1.00 percent and the highest money market rates are at 1.01 percent APY.

The next two meetings in 2015 are in June and July. The tool predicts there is a 22 percent chance the hike will happen in June and a 40 percent chance of a hike in July. If there is a hike during the July meeting the fed funds rate will probably be increased to between 0.25 percent and 0.50 percent. A 25 basis point hike will probably send the best 1 year bank CD rates towards 1.50 percent. The best savings rates and money market rates will also move towards 1.50 percent.

We will have to wait until the September before the likelihood of an increase is greater than 50 percent. The probability of a rate hike in September is at 57 percent. The market expectation is the fed funds rate will be hiked to between 0.25 percent to 1.25 percent, with the highest expectations being a hike to 0.50 percent.

For the October meeting, the expectations for an increase is at 77 percent and for the December meeting the expectations is at 87 percent. The market expects by December the fed funds rate will be increased to between 0.50 percent to 1.00 percent. The fed funds rate at 1.00 percent would send the top 1 year CD rates and variable account interest rates towards 2.00 percent.

These rate predictions are just predictions based on market expectations. We all know how many times the markets get things wrong. The predictions that the rate will be increased sometime in 2015 are correct. We just don't know when the first hike will happen and where the rate will end up by the end of 2015.

Author: Brian McKay
December 7th, 2014