CD Rates Continue Moving Higher but Don’t Lock Into a Long Term CD Right Now

We all know CD rates will be moving a lot higher in 2015 because the Federal Open Market Committee will increase the federal fund rate. Some banks and credit unions are jumping ahead of the FOMC by increasing CD rates now. This past month we have seen many banks increase intermediate and long term CD rates in hopes of locking in deposits at current lower rates.

You might be enticed to lock into a 2 year CD at a 1.50 percent CD rate (Chartway FCU's current 2 year rate) but that would be a mistake. By spring or summer of 2015, 1 year CD rates will be at or above 1.50 percent. Right now the current top 1 year bank CD rate is at 1.20 percent with an APY of 1.21 percent (Pentagon FCU's current 1 year CD rate).

As you can see the top 1 year rate is only 30 basis points below the top 2 year rate, not much of an incentive to lock into a 2 year CD when rates are moving higher. We are getting closer and closer to the point when the FOMC will increase the fed funds rate, which will send CD rates higher. Therefore shorter term CDs are the best bet right now.

The best CD rates on 6 month certificates of deposit are only marginally below the best 1 year rates. The highest 6 month rate on our rate list is at 1.00 percent with an APY of 1.00 percent. Comparing 6 month, 1 year and 2 year CD rates you can see how flat the rate curve is but that will change in the coming years.

To maximize your return over the next several years you should stay invested in short term or intermediate term CDs. The FOMC hasn't increased the fed fund rate yet, but when they do this cycle of increases isn't expected to end until 2017 or 2018. This means we will see 3 to 4 years of higher CD rates.

Projections for the fed funds rate in the coming yearsThis table to the right shows the majority of Fed officials believe the fed funds rate will be at 1.00 in 2015. The fed funds rate at 1.00 percent will send 1 year CD rates towards 2.00 percent. One Fed official believes the fed funds rate will be at 4.50 percent next year, a fed funds rate at that level will send 1 year CD rate above 5.00 percent.

Though it is highly unlikely we will see a 4.50 percent fed funds rate and 1 year CD rates at 5.00 percent in 2015.

A more likely scenario is for the fed funds rate to hit 4.50 percent sometime in 2017 or 2018 depending on economic growth, inflation and employment figures.

Make no mistake interest rates are moving higher in 2015, 2016 and, beyond. Therefore you should position your finances for higher interest rates.

Payoff any loans you have, lock in a low mortgage rate while you can. Stay invested in variable interest rate accounts (savings and money market account) and, short term CDs.

You can search for the highest short term CD rates on the rate tables: Highest CD Rates.
Author: Brian McKay
October 6th, 2014