Current Bank Rates Still Higher than U.S Bonds and TIPS

Some banks and credit unions have already increased their deposit rates by small amounts in anticipation of the FOMC increasing their key rate. Exactly when the Fed will increase the rate is hotly debated but rest assured the increase will likely come in the first half of 2015.

Bank rates are relatively unchanged so far this year. The highest savings account rate in the database remains at 1.05 percent APY and the highest money market rate remains at 1.01% APY. We will see higher deposit rates in 2015 because the Federal Open Market Committee is expected to increase the federal funds rate. Deposit rates are tied to the fed funds rate so when the FOMC increases the rate, deposit rates move higher.

The next Fed meeting is at the end of this month but it is highly unlikely the Fed will increase the rate then. The next two meetings are in March and April. The first likely increase will be right after the April meeting.

The initial and subsequent increases will be small unless inflation becomes a concern. The current low inflation rate and the big drop in oil prices indicate that inflation is an unlikely concern. We look for the first increase in the fed funds rate to be 25 basis points.

The current fed funds rate is near zero percent, so a 0.25 percent increase will send the best savings rates and money market rates towards 1.25 to 1.30 percent. The highest CD rates on 1 year certificates of deposit will move towards 1.40 to 1.50 percent.

These rates are low historically speaking but if you're looking for a safe place to put your cash, this is the best you can do these days. 1 year U.S. Treasury rates are considerably less. On Friday, the 1 year yield closed at 0.22 percent. In fact, to earn a higher rate from a U.S. bond, you would have to invest in 5 year bonds which are currently yielding 1.45 percent.

Another safe investment is in Treasury Inflation-Protected Securities (TIPS) but those rates are even lower because inflation is low. The shortest term TIPS are 5 year TIPS which are yielding 0.395 percent (maturity date 4/15/2019).