Higher CD Rates Expected During the First 6 Months of 2015

The stage is finally being set for higher CD rates during the first 6 months of 2015. Ever since the financial crisis and recession, CD rates and all deposit rates have been low. We have been dealing with these low rates for over 5 years now though it has seemed even longer. The Federal Reserve lowered the fed funds rate to a record low of zero percent to one quarter percent in December 2008.

The Fed's policy has sent average 1 year CD rates down 0.20 percent, which is a record low. Many banks set 1 year rates to lower average rates and even as low as zero percent. Banks weren't interested in collecting deposits because they weren't lending money. Even if they need money, they could borrow from the fed and other banks (overnight rate) for next to nothing.

Now that banks are willing to lend again and are loosening mortgage loan requirements, they are more interested in collecting deposits. Once the Fed increases the fed funds rate, banks will be even more inclined to increase deposit rates. The last pieces of the puzzle are a stronger economy, a higher inflation rate, and a lower unemployment rate.

While first quarter GDP contracted a sharp 2.9 percent due to the cold weather, second quarter GDP is expected to bounce back. Current estimates are for second quarter growth to expand 3.00 percent. Inflation is finally picking up. The consumer price index (CPI) increased 0.4 percent for May and is up 2.1 percent the past 12 months. The unemployment rate fell to 6.1 percent in June, which is the lowest point since September 2008.

We look for the Fed to increase the fed funds rate sometime during the first or second quarter of 2015. There is a slight chance the rate might even be increased in the final quarter of 2014. The current fed funds rate is near zero percent, so the Fed will have to act quickly to stay ahead of the inflation.

The rate will probably be increased in 0.25 percent increments throughout 2015. The Fed's own predictions are for the rate to be at 1.00 percent by the end of 2015. Some Fed committee members expect the rate to be increased even higher and one Fed official predicts the rate will need to be increased to 3.00 percent.

A 3.00 percent federal funds rate would send 12 month certificate of deposit rates to about 3.00 percent. The best CD rates on 1 year certificates of deposit will probably be above 4.00 percent. We haven't seen 1 year rates that high in over 6 years.

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Author: Brian McKay
July 16th, 2014