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Higher Deposit Rates in 2014 or 2015?

As we head into the final days of 2013, we are closing out another year of low deposit rates. Since the financial crisis and Great Recession, savings rates, CD rates, and money market rates have been woefully low. 2013 marks over 5 years of low rates and hopefully rates will move higher in 2014. That all depends on what the Federal Open Market Committee does with the federal funds rate.

Current Deposit Rates and the Federal Funds Rate

Current average savings account rates in the FDIC's Weekly National Rates and Rate Cap Survey are at 0.06 percent. The best savings rates in our database this week are much higher at 1.00 percent. Average money market account rates in the FDIC survey are at 0.09 percent this week and the highest money market rates in our database are 10 times that at 0.90 percent. Average 1 year bank CD rates are at 0.20 percent and the best CD rates in our database are at 1.09 percent with an APY of 1.10 percent.

Deposit rates follow the fed funds rate nearly exactly, meaning that when the fed funds rate moves higher, banks quickly follow by increasing deposit rates. The current fed funds rate has been in a targeted range of zero percent to one quarter percent since December 2008. The outlook for a higher fed funds rate and higher deposit rates in 2014 looked a lot brighter until the most recent FOMC meeting.

When Will Interest Rates Increase?

Until the December's FOMC meeting, the policy had been to keep the fed funds rate at current levels until the unemployment rate fell below 6.5 percent. In the December's FOMC Meeting Statement, the Committee changed policy and is now saying that "it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal."

Before the December meeting, it looked as if the Committee members might vote to increase the fed funds rate sometime in the middle of 2014, when the unemployment was likely to fall through the 6.5 percent range. Unfortunately, the Fed basically "decoupled" a higher fed funds rate based on the unemployment rate.

Inflation Rate is Now the Key to Higher Interest Rates

Now that the unemployment rate isn't the key factor to a higher fed funds rate and higher deposit rates, inflation is once again the key to higher rates. After inflation got out of control in the 1970's and early 1980's we haven't had a period of high inflation. In fact, over the past decade deflation has been a big concern of the Fed.

The current year-over-year inflation rate is only at 1.2 percent (CPI-U), well below the Committee's long term goal of 2 percent. The Committee's projection for inflation next year is below 2.00 percent and for 2015, the range is projected to be between 1.4 to 2.3 percent.

With inflation not being projected to move above 2.00 percent until 2015, it now appears that deposit rates won't move higher until 2015, once the fed funds rate is increased. 12 Committee members, a large majority of the 17 members, projected "policy firming," (aka higher fed funds rate) will be voted on by the Committee in 2015.

Until this month we predicted higher deposit rates by the summer of 2014. Now we will probably have to wait until 2015 for higher rates. The one bright spot to possibly higher rates next year is an economy that is looking stronger and stronger. The second revision to 3rd quarter GDP growth was increased from 3.6 percent to 4.1 percent.  In fact, a slew of recent economic reports released this past month gives us some hope for higher rates but we won't know for many more months. Therefore, you should keep your deposits in variable rate accounts or short term certificates of deposit to take advantage of higher rates when they finally do arrive.
Author: Brian McKay
December 27th, 2013