Returns on Certificates of Deposit Set to Increase

Investors looking to preserve capital while getting a decent return for their money have been out of luck for the past 6 years. That will change in the coming months because the Federal Reserve will increase their key benchmark interest rate, the federal funds rate.

CD rates and other bank rates are tied to the federal funds rate. When the federal funds rate is increased, banks follow suit by increasing deposit rates and loan rates. Higher deposit rates will be welcome news and are a very long time coming.

Ever since we witnessed the worst recession since the Great Depression, interest rates have been extremely low. The Federal Reserve embarked on an easing policy that sent the federal funds rate down to near zero percent.This policy has forced certificate of deposit rates, savings rates and all bank rates down to record lows.

The FDIC's current national average 1 year CD rate is at a paltry 0.20 percent. What's worse is the current national average money market rate is at 0.08 percent and the national average savings rate is at 0.06 percent.

Exactly when interest rates will increase is debatable but our expectation is that the increases will come sooner than later. In fact, some banks have already increased CD rates but the majority of increases won't come until the fed funds rate is increased.

Based on recent economic news, specifically recent wage gains, the first increase should come after the Fed's June meeting. According to the Fed's Meeting Calendar, the June meeting will end on June 17th. Right after the meeting, we expect the Fed will announce a 0.25 percent increase in the fed funds rate.

Online banks currently offering the top rates will quickly announce increases in their rates to stay on the top. The best CD rates available right now on 1 year certificates of deposit are between 1.10 percent and 1.20 percent. We look for the top 1 year rates to increase to 1.40 to 1.50 percent.

The Fed will continue to increase the rate in 0.25 percent increments after the June meeting. There are 4 more scheduled meetings for the year in July, September, October and December. By the end of 2015 the fed funds rate will be around 1.00 percent.

A 1.00 percent fed funds rate will send the highest 1 year CD rates above 2.00 percent by the end of 2015. If you have a certificate of deposit maturing anytime over the next 3 months be sure to roll it over into a short term CD.

This is especially true if you have a long term CD maturing, like a 5 year CD. Right now the best 5 year rates are just above 2.00 percent. Why lock into a 5 year CD at 2.00 percent when you can lock into a 1 year CD at 2.00 percent or higher?

After 2015 interest rates will move even higher. By the end of 2016 the best 1 year rates will be 3.00 percent or higher and by 2017 the top 1 year rates will be around 4.00 percent. Looking out to 2018 and beyond 1 year rates could be above 5.00 percent. The last time we saw 1 year rates that high was just before the financial crisis of 2007.

Author: Brian McKay
February 10th, 2015