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Savings Rates are Set to Move Higher in 2014 if Federal Reserve Increases Federal Funds Rate

Savings rates and all deposit rates were set to move higher in 2014 but now the verdict is out on whether or not interest rates will move higher. Savings rates, CD rates, money market account rates are all tied to the federal funds rate. The current federal funds rate has been in a range of zero percent to one quarter percent since December 2008.

Low Federal Funds Rate Keeps Savings Rates Low

A historically low federal funds rate has kept deposit rates near record lows as well going on 5 years now. For more than a year, the Federal Reserve has stated time and time again that they plan to keep the federal funds rate at the current level of near zero percent until the unemployment rate falls below 6.5 percent.

The current unemployment rate is at 7.3 percent, so it is conceivable that the rate will fall below 6.5 percent in the early summer of 2014. Based on this information, it was reasonable to believe that deposit rates would move higher in the summer of 2014 but that may change.

FOMC October Meeting Minutes Reveals Possible Longer Timeframe for Low Interest Rates

In the Federal Open Market Committee's October meeting minutes, a couple committee members wanted to lower the 6.5% unemployment rate point. That isn't the only possible change, a few members wanted to add that the federal funds rate wouldn’t be increased as long as the inflation rate was projected to run below 2.5 percent.

Now we don't actually know when deposit rates will increase but hopefully rates will move higher sometime in 2014. We still see higher savings rates in the summer of 2014. At this point, there is only a minority view on keeping the fed funds rate low past the 6.5 percent unemployment threshold.

Unemployment Rate and Inflation Rate are the Keys to Higher Savings Account Rates

Whether or not interest rates move higher when the unemployment rate falls below 6.5 percent is up to the FOMC. A higher inflation rate would cause the FOMC to act sooner than later, perhaps even before the unemployment rate falls below 6.5 percent. The current inflation rate is 1.7 percent, exactly where the Fed wants inflation to be - below their long term target of 2.00 percent.

If inflation were to move above 2.00 percent, the Fed could act sooner to increase the fed funds rate. It's more than likely that savings account rates, money market rates, and all interest rates will move higher next year. Now it could happen past our original forecast of summer 2014.

We might have to wait until the fall or even the winter for higher rates. The FOMC is scheduled to meet 5 times between July of 2014 and December of 2014, and an announcement of a higher fed funds rate would usually come right after a meeting. When an announcement is made, banks quickly follow suit by offering higher deposit rates.

Best Savings Rates Currently at 1.00 Percent

Right now, the best savings rates in our database of rates are at 1.00 percent. The best money market rates are at 0.90 percent and the best CD rates on 1 year certificates of deposit are at 1.04 percent with an APY of 1.05 percent.

You can search for the best interest rates right here: Best Savings Rates
Author: Brian McKay
November 22nd, 2013