Current Deposit Rates Remain Stable as Fed’s Yellen Talks Interest Rates

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Current savings rates and money market rates are stable this week. The highest deposit rates remain near 1.00 percent while average rates remain low. For over a year now, we have been writing about the Federal Reserve increasing the federal funds rate, their key benchmark interest rate. We won't see banks and credit unions increasing deposit rates until the Fed increases the fed funds rate. Well, we may see higher rates sooner than expected.

The Fed Chairperson, Janet Yellen, testified before the Senate Banking Committee this week and left the door open for increasing rates sooner than expected. Yellen basically said if the labor market continues to improve better than expected, the Fed will increase the fed funds rate sooner than expected.



"If the labor market continues to improve more quickly than anticipated by the [Fed]," she told the Senate Banking Committee, "then increases in the federal-funds rate target likely would occur sooner and be more rapid than currently envisioned." The general consensus was for the Fed to increase the fed funds rate sometime in the summer or fall of 2015.

Though Yellen's commented that rates would rise sooner than planned, she also reiterated that "a high degree of monetary policy accommodation remains appropriate." Employment growth has been stronger than expected but economic growth has been lackluster and inflation still isn't a concern.

The Labor Department report earlier this month showed the unemployment rate dropped to 6.1% in June as payrolls increased by a strong 288,000. The Fed was expected to increase the rate when the unemployment rate fell below 6.5 percent but changed its target late last year. Now there isn't a specific unemployment number that would trigger an increase in rates.

We look for the Fed to increase the fed funds rate sometime during the first two quarters of 2015. When the fed funds rate is increased, banks will quickly follow suit with higher deposit rates. The first increase in the fed funds rate will be small, probably 0.25 percent or maybe even 0.50 percent.

An increase of 0.50 percent or less would send savings account rates and money market account rates up marginally. The highest rates would probably to the 1.25 percent to 1.50 percent range. The highest 1 year CD rates would rise to a range of 1.35 percent to 1.60 percent, depending on the fed funds' rate increase.
 
Author: Brian McKay
July 16th, 2014