FOMC Fed Funds Projections Point to Low Savings Rates Until 2015

The highest savings rates and money market rates didn't increase this month and probably won't increase much for the rest of 2014. Until the FOMC increases the fed funds rate, which is currently near zero percent, deposit rates will remain near current levels. The FOMC released forecasts for the fed funds rate this month and now only one FOMC participant expects there will be a need to increase the fed funds rate in 2014.

The one participant believes the fed funds rate would need to be increased to 1.00 percent this year. If their projection is correct, savings rates and money market rates would move above 2.00 percent this year. Higher deposit rates sooner than later would be welcome news but don't count on it this year.

The Federal Open Market Committee's next meeting is on April 29th and 30th. While the FOMC won't increase the federal funds rate in this month's meeting, the FOMC is expected to continue to taper their monthly purchases of long term bonds and mortgage backed securities, slowing their monthly purchases another $10 billion a month down to $45 billion a month starting in May.

This move will force upward pressure on long term bond rates and mortgage rates but won't affect deposit rates at all. The fed funds rate is the key to higher deposit rates. The smart money is on the FOMC increasing the fed funds rate sometime in 2015. The FOMC's members' forecasts have the fed funds rate varying from 0.25 percent to as much as 3.00 percent next year.

A fed funds rate at 0.25 percent won't send savings rates and other deposit rates much higher than current levels. On the other hand, a fed funds rate at 3.00 percent would send savings rates and money market rates toward 4.00 percent. The best CD rates on 1 year certificates of deposit would be just above 4.00 percent.

FOMC forecasts for the fed funds rate in 2016 is at 0.75 percent on the low end and 4.25 percent on the high end. If the fed funds rate moves to 4.25 percent in 2016, variable interest rate accounts would move above 4.00 percent on average. Some financial institutions would increase variable interest rate accounts above 5.00 percent.

Below is a chart of the FOMC's participant's predictions for a higher fed funds rate.

Currently, the highest savings account rates are just under 1.00 percent at 0.95 percent and the best money market rate is slightly below at 0.90 percent. Average rates are even lower. This week's average rate is at 0.46 percent for account balances of last $10,000. The FDIC's national average rate on savings accounts is even lower at 0.06 percent and at 0.08 percent for money market accounts.

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