Fed Tapers and Annouces Key Rate Will Stay Near Zero Percent For a Long Time to Come

The Federal Open Market Committee (FOMC) made two surprising announcements yesterday after wrapping up their two day meeting. The first surprise was the Fed said they will scale back their bond and mortgage-backed securities purchases by $5 billion each, starting in January and won't fully end their purchases to the end of 2014.

The second surprise, which was probably designed to soothe investors' nerves about tapering, is "that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal."

When Will CD Rates Increase?

What this means is that CD rates, savings rates, and money market rates will stay low longer than expected. We had been forecasting an increase in deposit rates sometime in the second quarter of 2014, once the target of a 6.5% unemployment rate was reached but now it looks likely deposit interest rates won't move higher in any substantial way until 2015.

Until the most recent FOMC press release, forecasts for 1 year CD rates were to rise to around 2.00 to 3.00 percent by the end of 2014. Now we might have to wait until mid 2015 for CD rates to move above 2.00 percent. Right now, average 1 year bank CD rates are currently at 0.72 percent and the best 1 year CD interest rates available are at 1.10% APY.

When Will Mortgage Rates Increase?

The future direction for mortgage rates is still relatively the same, mortgage rates will continue to rise modestly for all of 2014 into 2015. 30 year conventional mortgage rates today are averaging 4.46 percent and 30 year jumbo mortgage rates are averaging 4.57 percent. By mid 2014 forecasts are for 30 year conforming rates to rise to around 5.00 percent and 30 year jumbo rates to rise just above 5.00 percent.

Current mortgage rates are higher from record lows but looking back historically rates are still incredibly low. The average rates listed above are just averages, there are many lenders quoting mortgage rates below the averages. Currently, the best 30 year conforming rates available are still just below 4.00 percent with points and the best jumbo rates are just above 4.00 percent with points.

Inflation is the Key to Higher Deposit Rates in 2014

Now that the Committee has voted to keep the fed funds rate near zero percent well past an unemployment rate of 6.5 percent, and made it official, the last hope for higher deposit rates sooner than 2015 is the inflation rate. The current inflation rate (CPI) on an annualized basis is 1.2 percent.

The current inflation rate at 1.2 percent is below the Fed's long term target of 2.00 percent, the point at which the Committee will feel compelled to vote for an increase in the fed funds rate. The inflation rate won't have to actually be above 2.00 percent for a higher fed funds rate, the "long term outlook" just has to be above 2.00 percent.

Unfortunately, in the Fed's economic projections released yesterday, the outlook for inflation was lowered. The current range for inflation next year is 1.4 to 1.6 percent, down from September's projection of 1.3 percent to 1.8 percent. The long term outlook for inflation past 2017 is projected to remain below 2.00 percent.

Whether or not inflation will increase next year remains to be seen but if the past 5 years are any indication, don't count on higher inflation or higher deposit rates next year.

Author: Brian McKay
December 19th, 2013