Certificate of Deposit Rates End 2014 Higher and Will Continue Increasing into 2017

Certificate of deposit rates ended 2014 on a positive note as banks began increasing CD rates ahead of the expected federal funds rate increases in next year. The increases were small and the number of banks increasing rates were also small but 2015 is shaping up to be a better year for rates.

2014 also marks the first year since 2006 that average CD interest rates moved higher and not lower. Bank rates remained low for so long because the Federal Reserve has kept the fed funds rate near zero percent since December of 2008. The last time the federal funds rate was actually increased was back in June 2006, when the rate was increased 25 basis points to 5.25 percent.

Back in June 2006, you could easily find 1 year CD rates above 5.00 percent. Currently, the best 1 year CD rates available are just above 1.00 percent and most banks still offer 1 year rates below 1.00 percent. Rates at current levels are actually an improvement from preceding years.

The longer term outlook for deposit rates is also higher as the Federal Reserve is expected to increase interest rates for the next several years. The last cycle of increases started in November 2003 when the fed funds rate was at 1.00 percent and ended up at 5.25 percent in June 2006. We can expect this cycle of increases to last as long and possibly take the fed funds rate towards 5.00 percent by the end of 2017.

The fed funds rate near 5.00 percent in 2017 would send 1 year CD rates above 5.00 percent for the first time in a decade. Variable interest rate accounts such as savings accounts and money market accounts would also garner yields above 5.00 percent. Less rosy forecasts have the fed funds rate around 3.50 percent by the end of 2017, which would send 1 year rates and variable deposit rates above 4.00 percent.

These forecasts are based on the presumption that the U.S. economy will to expand, a strong jobs market will continue and that there will be an increase in the inflation rate. There are many factors that could derail these forecasts, especially if an international economic slowdown drags the U.S. economy down with it. Growth in China is slowing, the Japanese economy slipped into recession again and growth in Europe is slipping.
Author: Brian McKay
December 26th, 2014