CD Rates Remain Low as Majority of Fed Officials Indicate They Did Not Expect to Increase Rates Until 2015
Dealing with low CD rates and other deposit rates for five years is getting tiring but unfortunately we have another two years of low interest rates. In the most recent Federal Open Market Committee, 15 of 19 Fed officials indicated they don't expect to increase the federal funds rate until sometime in 2015. This means bank CD rates will also remain at current levels to at least 2015.
The 2015 date also depends upon a certain level of economic growth and for the nation's unemployment to fall below 6.5 percent. Current economic news released showed growth slowing down, so it may be even more than 2 years for the Fed to increase the fed funds rates. First quarter GDP growth was lowered to 1.8 percent, down from the first estimate of 2.4 percent.
Slow Growth Will Keep CD Rates Low
Slower growth and inflation within the Fed's target of 2 percent will force the Fed to keep interest rates where they are and continue their stimulus programs. This will keep downward pressure on CD rates, savings rates and all loan rates. The Fed has been buying $85 billion a month in mortgage-backed securities and long term U.S. bonds to keep long term interest rates low. The Fed will continue its existing policy of reinvesting principal payments in mortgage-backed securities and U.S. Treasuries.
The markets were running for the exits recently selling U.S. treasuries and driving treasury yields considerably higher.
Fed Officials Talking Down Interest Rates
Two Fed officials had speeches to ease concerns about the Fed ending their stimulus programs. Dennis P. Lockhart, president of the Federal Reserve Bank of Atlanta had some colorful words on the matter:
I don’t want to be too cute about a serious matter, but to make an analogy, it seems to me the chairman said we’ll use the patch and use it flexibly and some in the markets reacted as if he said ‘cold turkey.'
Another Fed official William C. Dudley, president of the Federal Reserve Bank of New York, made the case that the markets are overreacting to Ben Bernanke's speech and the increase in interest rates is unwarranted. Following are some of his remarks at the Regional Economic Press Briefing, New York City.
Some commentators have interpreted the recent shift in the market-implied path of short-term interest rates as indicating that market participants now expect the first increases in the federal funds rate target to come much earlier than previously thought. Setting aside whether this is the correct interpretation of recent price moves, let me emphasize that such an expectation would be quite out of sync with both FOMC statements and the expectations of most FOMC participants.
Bond Yields and CD Rates
The recent increase in bond yields won't last. Interest rates will move lower again over the next several months. While we probably won't see 10 year bond yields break through the record low of 1.62 percent this year, we will see rates fall back to the 2.00 percent level. Short term CD rates on 1 year certificates of deposit will remain at current levels of around 1.00 percent.
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