2014 Year End Variable Interest Rates and Outlook for 2015

Variable interest rates ended 2014 higher at the beginning of the year. 2014 is the first year since the Great Recession that savings rates and money market rates moved higher as the year progressed. 2015 looks to be an even better year for deposit rates because the Federal Open Market Committee (FOMC) is expected to increase the federal funds rate sometime next year.

Savings rates, money market rates, and certificate of deposit rates are tied to the federal funds rate. When the fed funds rate moves higher, banks and credit unions increase deposit rates. 2015 will be the first year of a multi-year cycle of higher interest rates, the first up-cycle in about 10 years. You can view past interest rate cycles for the federal funds rate on the Federal Reserve Bank of New York's website: Historical Federal Funds Rate Targets.

The FOMC lowered the fed funds rate to near zero percent in December 2008, which set the stage for banks and credit unions to lower deposit rates. Financial institutions have kept deposit rates low since 2008 but started increasing deposit rates in 2014 in anticipation of a higher fed funds rate in 2015.

While the increases have been small, there were more increases than decreases in 2014. The best savings rate this week is at 1.05 percent APY and the best money market rate is at 1.01 percent APY. This week we also have 8 financial institutions offering deposit rates at or above 1.00 percent. These rates are slightly below the best 1 year CD rates, which are currently around 1.15 percent APY.

A rate difference of only 10 basis points isn't enough to lock into a 1 year CD account. At this point in the interest rate cycle, you're best served by sticking with variable interest rate accounts instead of 1 year certificate of deposit. This way you position your accounts to earn a higher yield sooner than later once rates move higher.
Author: Brian McKay
December 31st, 2014