Bank Interest Rates: No Increase in Rates Until a Higher Federal Funds Rate

The best savings rates currently available are around 1.00 percent and the best money market rates are at 0.90 percent. The highest savings account rates and money market rates will remain near 1.00 percent this year because of the Federal Open Market Committee's current policy of keeping the fed funds rate near zero percent.

The FOMC met last week and decided to cut another $10 billion from their monthly purchases of mortgage backed securities and long term Treasuries. The FOMC kept the federal funds rate in a targeted range of zero to one quarter percent, which will keep deposit rates low for the foreseeable future.

Savings rates, money market rates, and CD rates are all tied to the federal funds rate. When the Fed increases or lowers the rate, financial institutions quickly follow suit by increasing or lowering deposit rates. Keeping the fed funds rate at current levels came as no surprise because in December, the Fed announced that the rate wouldn't change even if the unemployment rate fell below 6.5 percent. Prior to the December announcement, many of us believed the Fed would increase the rate when the unemployment rate fell below 6.5 percent. Now it looks like a higher fed funds rate will happen once the unemployment rate goes down towards 5.5 percent, believed to be sometime in 2015.

Committee Member's Forecast for the Fed Funds Rate in 2015

We might have to wait until 2015 for higher rates but one thing is for sure, eventually the fed funds rate will have to be increased and the increases will come quickly. The Fed's own economic projections have the fed funds rate anywhere between the current level up to 3.25 percent by the end of 2015. The majority of Fed Committee Members' forecasts expect that 2015 will be the time for "policy firming." A majority also believe the rate will still be under 1.00 percent next year.

A 1.00 percent fed funds rate will mean variable rate accounts such as savings accounts and money market accounts would be as high as 2.00 percent to 2.5 percent. 1 year bank CD rates would also move above 2.00 percent with a 1.00 percent fed funds rate. Not all banks and credit unions would increase their rates this year, only the financial institutions looking to attract deposits by offering higher rates.

2016 Forecasts for the Fed Funds Rate and Deposit Rates

There are even higher forecasts for the fed funds rate in 2016. The highest forecast from one Committee member is a 4.25 percent fed funds rate. Another member's forecast is for a fed funds rate of 4.00 percent but the majority of members have their forecasts still below 2.00 percent.

A fed funds rate in a range of 2.00 percent on the low end and 4.25 percent on the high end would mean deposit rates of 3.00 percent to 5.25 percent in 2016. Looking past 2016, a majority of members have forecasts for a 4.00 percent fed funds rate. After many years of extremely low rates, it will be nice to see any increase in rates in the coming years.

Could We See 5.00 Percent Deposit Rates Again?

Where exactly the fed funds rate is in the coming years will depend on economic growth and inflation. Stronger growth and higher inflation will send the fed funds rate above 4.00 percent. Less growth and lower inflation will keep the rate below 2.00 percent.

A fed funds rate above 4.00 percent would send the highest savings account rates and MMA rates to 5.00 percent. The highest CD rates on 1 year certificates of deposit would also be around 5.00 percent. The good news is that deposit rates are moving higher in the coming years.

Stay Invested in Variable Interest Rate Accounts

We have said this before and will say it again, interest rates on all deposit accounts are moving higher in the coming years. The wise move would be to stay invested in variable rate accounts. If you prefer investing in certificates of deposit, don't lock into a long term certificate of deposit with a low rate now.

You might be tempted to lock into a 3.00 percent 5 year CD but you'll regret it in the coming years. Even when 5 year rates move above 4.00 percent or 5.00 percent, don't lock into a long term account until the interest rate cycle has peaked. The key to locking in at the top is waiting for economic growth to slow, at that point the Fed will start decreasing rates to spur growth. When this happens then you can lock into a long term CD when interest rates are declining.  CD interest rates are not expected to peak until late 2017 or beyond.

Current Savings Rates

The top savings rates available from banks and credit unions are around 1.00 percent. The top savings rate on our national list of rates is from First Trade Union Bank at exactly 1.00 percent. We have five other banks, Barclays Bank, CIT Bank, GE Capital Bank, Union Federal Savings Bank, and The Palladian Private Bank all offering rates at 0.90 percent.

The rates offered by these banks are much higher than the current national average rate of 0.06 percent as reported by the FDIC this week. These rates are also much higher than the FDIC's national average jumbo savings rate, also at 0.06 percent this week.

Current Money Market Account Rates

The best money market account rates available are are at 0.90 percent from Sallie Mae Bank and Union Federal Savings Bank. This rate is slightly lower than the top savings rate and much higher than the national average rate of 0.08 percent. Other banks on our list offering rates many times the FDIC average include EverBank at 0.86 percent, Mutual of Omaha Bank at 0.85%, and Ally Bank, also at 0.85 percent.
Author: Brian McKay
February 6th, 2014