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The Feds Pause Continues – Rate Predictions & CD Strategies for 2019

The Feds Pause Continues – Rate Predictions & CD Strategies for 2019

As expected, the Fed reaffirmed its patience policy by holding steady with the federal funds rate target. The post-meetingstatementcontained the same patience language that was in previous meeting statements:

In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.

One change from the March statement is the description of growth of economic activity. In March, the statement read, growth of economic activity has slowed from its solid rate in the fourth quarter. Todays statement read, economic activity rose at a solid rate. This change should reduce the odds of a 2019 Fed rate cut.

However, another change raises the odds of a 2019 rate cut. That change is the Feds view of inflation. Todays statement clearly admits that core inflation has declined and is running below the Feds target:

On a 12-month basis, overall inflation and inflation for items other than food and energy have declined and are running below 2 percent.

In March, the statement read, inflation for items other than food and energy remains near 2 percent.

Fortunately, the Fed still views these low inflation measurements as transitory. In the post-meeting press conference, Fed Chair Jerome Powell did warn that if inflation were to run persistently below their target for a sustained period of time, it would impact their policy decisions. The Fed Chair claimed that they are strongly committed to [the] 2% inflation objective and to achieving it on a sustained and symmetric basis. If inflation continues to run low, the Fed may cut rates to prove they are serious about this claim, even with strong economic growth. However, I dont see the Fed acting quickly in this direction. Unless the economy experiences a significant slowdown, low inflation probably wont force the Fed to cut rates until late 2019 at the earliest.

This policy action was an unanimous decision with no policymaker dissenting.

The federal funds rate futures as shown by theCME FedWatch Toolcontinue to show zero chance of a Fed rate hike in 2019. However, the odds of a rate cut have gone down from yesterday. The futures now show only a 6.7% chance of a rate cut at the June meeting. Thats down from 22.0% yesterday. The futures now show a 52% chance of a rate cut by December. Thats down from 66% yesterday.

The next threeFOMC meetingsare scheduled for June 18-19, July 30-31, and September 17-18. The June and September meetings will include the summary of economic projections. All meetings now include a press conference by the Fed Chair.

With little chance that the federal funds rate will rise this year, online savings account rates may be at a peak. Several online savings account rates are already near the top of the target range of the federal funds rate (2.25% to 2.50%). The well-established internet banks like Ally and Discover Bank have online savings account rates just below this range while the newer internet banks that are being more aggressive have rates that are in this range. These internet banks include PurePoint Financial, Rising Bank, Vio Bank and Citizens Access. As long as the Fed holds steady, I doubt well see much movement in these savings account rates.

CD rates forecasting is more difficult. Several other factors in addition to movement (or lack of) in the federal funds rate impact this. Low inflation is one thing that is producing downward rate pressure. This is seen first in the Treasury market. Long-datedTreasury yieldshave been falling since November.

On November 8, 2018, the 10-year and 5-year Treasury yields were 3.24% and 3.09%, respectively. After the last Fed meeting on March 20th, the 10-year and 5-year Treasury yields were 2.54% and 2.34%, respectively. Now, the yields are even lower at 2.52% and 2.31%. In less than six months, the 10-year yield fell 72 bps and the 5-year yield fell 78 bps.

You can also see the rate declines in brokered CDs. On November 6, 2018, the top 5-year brokered CD rate at both Vanguard and Fidelity was 3.55%. Last week, the top 5-year brokered CD rate was 2.75%. Thats a fall of 80 bps. That decline is actually very similar to the 5-year Treasury yield decline.

Top direct CD rates have not fallen as much, but they have fallen. On November 6, 2018, the top 5-year CD APYs were 4.00% for credit unions and 3.50% for banks. Last week, the top APY was 3.40% for both credit unions and banks.

Direct CD rate changes tend to lag brokered CD rates. So its likely we will continue to see direct CD rates slowly fall even as the Fed holds rates steady. If economic conditions worsen, larger and more widespread CD rate declines should be expected.

Since we are likely at or near the rate cycle peak, I think it makes sense to look at long-term CDs. Many savers avoided these in 2018 as rates were rising. Its no longer the time to avoid them. If you had suspended your CD ladders by not re-investing maturing CDs into new long-term CDs, its time to continue with your CD ladders by investing those funds back in long-term CDs.

There is still a slight chance that we are not close to the peak of this rate cycle. If you have any worry about being locked into a 5-year CD, make sure the 5-year CDs have early withdrawal penalties (EWP) of no more than six months interest. In addition to reducing the risk of being locked into a CD as rates rise, it also gives you more flexibility to be able to use those funds for some other purpose that may arise in the future.

Ive plugged in some top 5-year CDs into ourCD Early Withdrawal Penalty Calculatorso you can see how current competitive 5-year CDs compare to competitive 1-year CDs when the 5-year CDs are closed early. Todays top nationally-available 1-year CD is currently 3.00% APY atCD Bank. The top 5-year CD rate is currently 3.40% APY atUniversity FCU. If that 5-year CD is closed early after one year, the effective yield due to the 90-day EWP is 2.55%.Ally Banks5-year CD rate is currently 3.00% APY. If Allys 5-year CD is closed after one year, the effective yield due to the 5-month EWP is 1.75%.

Please note that some institutions have language in their disclosures that give the institution the right to disallow a request by a customer to make an early withdrawal of principal. In other words, theres no guarantee that an early withdrawal of principal will be possible for some banks and credit unions. Also, there have beencaseswhen credit unions have increased the early withdrawal penalties on existing CDs. Caveat emptor.

If you have CDs that wont be maturing until later this year or next year, consider add-on CDs with long terms. Open the add-on CD now and you will lock in todays CD rate until the CD matures. If rates fall by the time your current CDs mature, you can fall back on that add-on CD by making additional deposits into the add-on CD. Those additional funds will then begin earning that same CD rate that was set when the add-on CD was opened.

One of the top 5-year CDs that are included in the above CD EWP Calculator allows add-on deposits. Its the 5-year CD special atGTE Financial Credit Union. The Jumbo special earns 3.30% APY. This requires a $100k minimum deposit. The regular special earns 3.04% APY, and it requires only a $500 minimum deposit. Please refer to myreview of these CD specialsfor more details. Please note that these specials may not last much longer.

The new internet bank,Rising Bank, offers two add-on CDs. These are called Rising CDs, and they have terms of 18 months and 3 years. For add-on CDs, the longer term ones are best for hedging bets on interest rates. The 3-year Rising CD currently earns 2.90% APY (10 bps lower since March 20). Unfortunately, it has a high minimum deposit requirement of $25k. Theres a maximum balance of $500k, which is an important limitation to note. Another important limitation is that you are allowed to make no more than two additional deposits during the term of the 3-year Rising CD, and each deposit must be a minimum of $5k.

The 3-year Rising CD also provides two options to increase the rate if the 3-year Rising CD rate should happen to rise. I dont consider that an important feature. Its not clear in the CD disclosure, but Ive been told by a Rising Bank official that this rising rate feature is completely independent from the add-on feature. In other words, you can exercise the add-on feature without the interest-rate feature. So if the CD rate falls, you dont have to worry about your CD rate falling when you make the add-on deposit.

Its now time to seriously consider long-term CDs for your safe money. Choosing 5-year CDs with early withdrawal penalties of no more than 6 months of interest can help reduce the risk of being locked in if rates should happen to rise in the future. Also, add-on CDs can help deal with the possibility of falling rates. If rates do fall, you can always add more to the add-on CD.

Are GTE Financials promo CDs (with unlimited add-on allowances) still in effect? Their website consistently indicated this offer was good only through April 30th. In any case, if youre outside of Florida and wish to join this CU be prepared to have blood drawn.I have a 5 year add-on with them that I opened earlier. It looks like the same terms apply from the website. Just to be 100% sure I would give them a quick call just to double check.

if youre outside of Florida and wish to join this CU be prepared to have blood drawn.

They are still listing these CDs on their website. They did change the promo page without mention of that cruise promotion, but these add-on CDs appear to be the same.9 – This comment has been removed for violating ourcomment policy.3 – This comment has been removed for violating ourcomment policy.Im going to double down on my rate hike prediction of one hike by Dec. 2019 or Jan. 2020. I feel that the economy is doing very well and this will lead to a inflationary spike eventually. Surprisingly, It looks like Im not totally alone in this belief either.

He wont get the rate reduction and, once again, people will be proven wrong that Trump has some magical control over monetary policy. He is advocating for lower rates to stimulate growth; its the opposite of the voices here clamoring for higher rates to improve their interest bottom line at the expense of every borrower. Its nothing more than an economic policy debate.

Lets hope the economy chugs along until the election and the FED remains prudent. If the dems win based on a slowdown, lookout below. Taxes will rise, deficits will skyrocket and the manufacturing base will stall. Savings is one cash pot they will go after with a vengeance. Remember, you didnt build that pot.We are quite aware of political ramifications and able to do an analysis ourselves. But where is your financial plan given your forecast …it is?20 – This comment has been removed for violating ourcomment policy.21 – This comment has been removed for violating ourcomment policy.22 – This comment has been removed for violating ourcomment policy.23 – This comment has been removed for violating ourcomment policy.24 – This comment has been removed for violating ourcomment policy.27 – This comment has been removed for violating ourcomment policy.25 – This comment has been removed for violating ourcomment policy.

if you want to know where the rate heading look to EUROPE JAPAN GERMANY all they have low rate and they will still low for long time so the US cant raise there rate .Im new to this site and to investing with cds What is reasoning behind getting 5 year cds because we are the peak of this rate cycle? Do you anticipate rates to be lower than the current rates for 5 years? Couldnt the economic circumstances cause rates to go up in 2 years or 3 years? I understand the advice to get the 5 year cds with early withdrawal penalties of no more than 6 months of interest, 5 years just seems like a long time.

Only a few months ago there was some concern about the direction of the American economy. The stock market was down. Interest rate increases faltered and rates flattened a bit.Some fell. Even now you will find reports of American financial institutions cutting their interest rates slightly.

However, the Fed met this week and did not cut. Then today the employment report for April came in quite strong. Generally, when people can find work it is supportive for the economy. The stock market also rallied on todays news. Even people of color and Americans less well off are finding work . . . . and paying taxes. If this trend sustains itself I do not think interest rates will continue to fall; actually just the opposite.

There are negatives. The American economy is leading the world today, which makes us the envy of other nations. A strong American economy, again if and only if sustained, is problematic for some persons, both domestic and foreign, who seek a change in Americas leadership. There are a great many such persons, here and abroad, who would not mind too much if we fell off our high perch. And such a fall would lead to lower interest rates across the board.

So you see there are countervailing forces operating right now, some of which would lead to higher interest rates and others which mitigate in favor of lower interest rates. In such an environment as this, five years is a REALLY long time!

You appear to be one of the few here that looks at the broader picture with eyes wide open rather than focusing on self interest alone.

How do high interest rates serve their interests? And of course federal state and local governments have enormous outstanding debts as well. I understand this is a site for savers, and thats probably why Ive never seen this point mentioned (Im sure it has been, although I havent seen it in the time Ive been here. But it is perhaps the most important point when it comes to the discussion of interest rates.

Im not advocating for lower rates, simply reminding of the other side of the coin.

Weve had historically low savings rates now for at least a decade. Perhaps if there had been more incentive to save (how did saving for tomorrow become either a bad or foolish aspiration?) we would not have so many debtors (or amateur stock traders).

Staying debt free was always enough incentive to save. Thats what I was taught at a very young age. Save for tomorrow rather than spend what you dont have today. Common sense goes a long way to a persons financial well being.

Has anyone else been buying the no-penalty CDs? I sure like them. Kind of a hybrid savings account. 2.50% for 13 months. Ive been getting one every 2 or 3 months, trying to extend them as long as possible before any possible rate deduction. A great simple & liquid savings vehicle.

Milt… those in for long haul and not rich rely upon savings to a lesser degree. The dye was cast 10 years ago and there is NO excuse to not plan for low rates as the norm. And after seen several businesses have good non-default loans being called by lenders (due to capital requirements) there are few safe harbors especially with a RE president mindset.

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Feds Pause Has Begun – Rate Predictions & CD Strategies for 2019


There were no surprises yesterday when the Fed made its post-meeting statement. The federal funds rate remained the same, and the same patience language was used to describe the Feds future plans:

One thing that did change in the statement from January was the description of the current economic condition. There were clear downgrades in its view of the economy:

In January, the Feds statement included these positive views:

Yesterdays statement changed the above lines to the following:

This policy action was an unanimous decision with no policymaker dissenting.

As expected at the FOMC meeting, there were no changes in the federal funds rate. However, key language of the FOMC statement did change which sends a signal that the Fed will likely pause on rate hikes. The following sentence that was in the December FOMC statement is gone:

The above sentence has been replaced in the January FOMC statement by the following:

All voting members voted for todays policy decision. There were no dissents.

In addition to the change in the FOMC statement, the Fed issued a separate statement on balance…

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. Heres that all important paragraph in todays FOMC statement:

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.

As expected, no policy changes were announced today at the end of the two-day FOMC meeting. The Fed decided to hold off on a rate hike. The FOMC statement had nothing to suggest any change to their gradual rate hike policy which means that a December rate hike is very likely.

The economic overview in todays FOMC statement was very similar to the September statement. There were only two changes. The description of the unemployment rate went from stayed low to declined. The other change was the growth of business…

The Fed moved as expected by raising the federal funds rate by 25 basis points. This is the third Fed rate hike of 2018 and the eighth rate hike since the Fed started to raise rates in December 2015. Heres that all important paragraph in todays FOMC statement:

This paragraph is shorter than it has been in the past. The Fed removed the sentence about monetary policy remaining accommodative.

The opening paragraph in the FOMC statement that describes the state of the economy is essentially the same as what was…

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