This is my new weekly review of the Fed, the economy and what we can expect of future deposit rates. This used to be part of my weekly summary, but it will now be a separate post. My weekly summaries will now be focused entirely on deposit rates and deals, and they will be published on Tuesday evenings. This change was done to separate the economic and political discussion from the deal discussion. Often economic discussion leads to political discussion, and that can create lots of comments which drown out comments on deals and rates. To avoid that, please limit comments related to the Fed, the economy and politics to these blog posts.
In speeches and interviews over the last week, Fed officials have grown a little more dovish. Fed Chair Jerome Powell and Fed Vice Chair Richard Clarida have both made the point that the Fed will be patient. In a discussion at the Economics Club of Washington on Thursday, Fed Chair Powell said.
“We have the ability to be patient and watch patiently and carefully as we see the economy evolve and figure out which of these two narratives is going to become the story of 2019,”
Fed Vice Chair Clarida made similar remarks in a speech on Thursday evening.
As for new economic data, we had some inflation data released in the last few days. Last Friday, the Consumer Price Index (CPI) for December was released. As this Bloomberg article described, it didn’t improve the odds of a Fed rate hike in March.
A key measure of U.S. inflation was little changed in December while falling energy prices dragged down the broader gauge, giving the Federal Reserve little urgency to raise interest rates soon as it signals a more cautious approach in 2019.
The odds of Fed rate hikes in 2019 didn’t change much from last week. The odds of a March Fed rate hike are slim according to the Fed Fund futures as indicated by the CME FedWatch Tool. They show odds of only 5.1% which are down from 10.9% last week. The odds of a rate hike by September are about the same as last week (23.5% which is up from 23.0% last week).
The odds that the federal funds rate will be 25 bps higher in December (20.6%) is actually lower than the odds for September or June. That’s due to substantial odds that there will be a rate cut by December. The odds that the federal funds rate will be lower by December is now 13.6%, which is up from 10.1% last week.
Short-dated Treasury yields were up slightly from last week, while long-dated Treasury yields are up. The 30-year Treasury bond had the largest yield change, rising 9 bps from last week to 3.08%.
With long-dated Treasury yields rising while short-dated yields falling, there’s less inversion on the yield curve this week. The 1-year yield (2.57%) is still above the yields of the 2-year (2.53%) and the 5-year (2.53%). The 10-2 spread (the difference between the yields of the 10-year and 2-year Treasury notes) widened from last week from 17 bps to 19 bps. A negative 10-2 spread has a history of preceding recessions.
Treasury Yields (Close of 1/15/19):
- 1-month: 2.41% down from 2.42% last week (1.31% a year ago)
- 6-month: 2.52% down from 2.54% (1.59% a year ago)
- 1-year: 2.57% down from 2.58% last week (1.78% a year ago)
- 2--year: 2.53% same as last week (1.99% a year ago)
- 5--year: 2.53% same as last week (2.35% a year ago)
- 10-year: 2.72% up from 2.70% last week (2.55% a year ago)
- 30-year: 3.08% up from 2.99% last week (2.85% a year ago)
Fed funds futures' probabilities of future rate hikes by:
- Mar 2019 - up by at least 25 bps: 5.1% down from 10.9% last week
- Jun 2019 - up by at least 25 bps: 22.3% down from 23.0% last week
- Sep 2019 - up by at least 25 bps: 23.5% up from 23.0% last week
- Dec 2019 - up by at least 25 bps: 20.6% up from 19.8% last week
- Dec 2019 - up by at least 50 bps: 1.9% up from 1.6% last week
- Dec 2019 - down by at least 25 bps: 13.6% up from 10.1% last week
CD Interest Rate Forecasts
Is it time to go long with your CDs? That’s the difficult question. If you wait too long, you might miss your chance of locking in the best rate for terms of five or more years. That’s the risk with short-term or mid-term CDs. Those yields are nice, but when they mature, you might have to settle for much lower rates.
When the federal funds rate reached its plateau in 2006 to 2007, we didn’t see widespread drops in CD rates. So if the Fed pauses on rate hikes, we may see the same condition this year without widespread CD rate cuts. However, I think it’s likely that banks and credit unions will come out with fewer long-term CD specials. Short-term CD specials will probably continue to dominate.
There’s definitely a possibility that a Fed pause may turn into a plateau for the federal funds rate. If economic data starts to consistently disappoint, the Fed may start to mention the possibility of a rate cut down the road.
As the market sees the likelihood of an economic slowdown increase, long-term rates will suffer to some degree. We’ve already seen that in Treasury yields and brokered CD rates (I’ll have more on this in my CD summary). Direct CDs will generally be slower to react.
The above graph shows the rate trends of the average CD rates. These average rates are based on all the rate data that we have collected over the years. This is an interactive graph. You can choose the term of the CDs (from 3 months to 5 years) and the look-back period (from 3 months to 5 years). As you can see in the graph, average CD rates for all terms have increased in the last year with the largest gains occurring after March 2018.