Get Ready for Higher Deposit Rates, an Equity Markets Rally, and Lower Long Term Bond Yields
Deposit rates might finally be moving higher. That is if the Federal Reserve increases the federal funds rate this week. The Fed is holding their two day meeting tomorrow and Thursday. If the Fed finally increases the fed funds rate, the Fed will make an announcement on Thursday at 2:30 PM.
The much anticipated rate hike will have less of an impact on equity markets. In fact, markets might actually rally on the news. Short term Treasury yields, which are more directly influenced by Fed policy, will increase. Long term bond yields, which are more influenced by long term inflation expectations, will most likely move lower.
The Kansas City Federal Reserve recently released a paper which shows how the Fed policy impacts the economy. The U.S. economy overall has become less responsive to the Fed's monetary policy as the economy has transformed from a manufacturing based economy to a services based economy.
As a result of the change, total employment responds to changes in monetary policy differently today than a few decades ago. You can read more about this change on the Kansas City Fed's website "Has the U.S. Economy Become Less Interest Rate Sensitive?"
If the Fed does raise the fed funds rate, there is almost 100 percent certainty that the hike will be 0.25 percent. The current fed funds rate has been in a range of zero percent to 0.25 percent since December of 2008. A 25 basis point hike will send the best savings rates and money market rates up by 25 basis points as well.
Not all banks will increase their rates but the banks that have the best rates now will more than likely increase their rates to remain on top. Currently, the highest savings rates and money market rates in our database are at 1.10 percent APY.
You can see list of all current deposit rates in our database by using our rate table at Variable Deposit Rates.
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