The Fed defied pressure and hiked rates today. A rate hike was the consensus, but there had been increasing pressure for the Fed to pause. This is the fourth Fed rate hike of 2018 and the ninth rate hike since the Fed started to raise rates in December 2015. Here’s that all important paragraph in today’s FOMC statement:
In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 2-1/4 to 2-1/2 percent.
This policy action was an unanimous decision.
There are signs in both the FOMC statement and in the FOMC projections that future rate hikes will be fewer and more gradual than this year.
The FOMC projections now show two hikes of the Federal funds rate in 2019 instead of three that were shown in September. For 2020 and 2021, the projections show a federal funds rate in the range of 3.00% to 3.25%. That suggests that there will be only three more rate hikes.
Future FOMC Meetings
The next three FOMC meetings are scheduled for January 29-30, March 19-20, and April/May 30-1. The March meeting will include the summary of economic projections. All future meetings will include a press conference by the Fed Chair.
What Savers Should Expect in 2019
As we have seen in 2018, online savings account rates have followed the federal funds rates. We now have many online savings account yields between 2.00% and 2.50%. I expect that will continue into 2019. If we do see two Fed rate hikes next year, the target federal funds rate will be in the range of 2.75% to 3.00%. If that does happen, it’s likely that we’ll see online savings account rates around 3% by the end of next year.
CD rate forecasts are more difficult. Uncertainty in the future economy may suppress long-term CD rates. Thus, 5-year CD rates may not be much higher than savings account rates. So even if we see online savings account rates around 3% by the end of next year, we may not see any widespread 4% 5-year CDs.
Lastly, don’t hold your breath for deposit rate hikes at your brick-and-mortar banks. As I showed in my recent rate trends chart, the average savings account rates at brick-and-mortar banks and credit unions remain low.
Deposit Account Strategies
One strategy for your safe money is to keep your money in top savings accounts, and wait for signs that we’re at the top of the rate cycle. For example, if we have several Fed meetings without a rate hike and the Fed’s economic projections become more pessimistic, that would be a strong sign that we’re at the top of the rate cycle. Then it would be the time to lock into long-term CDs. While the money is in savings accounts, you can keep an eye out for those hot CD deals.
This strategy makes it important to choose internet banks that have solid ACH transfer capabilities. If you find a hot CD deal or if your internet bank falls behind on rates, you’ll want to be able to easily and quickly move your money. You don’t want an internet bank that has small ACH transfer limits or slow ACH transfer speeds.
It’s important to remember that there could be surprises in future interest rates. Conditions can change fast, and we may not recognize the significance until rates have already responded.
If you want to keep things simple for your safe money, CD ladders are a tried-and-true way to invest in CDs. The ladder ensures you take advantage of higher rates as interest rates rise. The ladder also ensures that you’re taking advantage of longer-term CDs that protect against falling interest rates.
You may want to favor shorter-term CDs for your ladder as interest rates keep rising. Top 5-year CD rates aren’t much higher than top 3-year, 2-year and 1-year CD rates. When it appears that we’re at the top of the rate cycle, it would be time to start switching to 4-year, 5-year or longer-term CDs.
One thing to beware of when deciding on a CD ladder with shorter-term CDs is that the short-term CD rates at many internet banks are too low to be useful. These are 3-month, 6-month and 9-month CDs with rates that are much lower than their online savings account rates. These short-term CDs don’t make any sense. If you’re starting a CD ladder, don’t choose short-term CDs with rates under savings account rates.