Will Deposit Rates Move Higher When the Fed Meets in June?

The Federal Open Market Committee is scheduled to meet next month to decide the direction of monetary policy. All eyes will be on the Fed to see if they announce a federal funds rate hike. While a rate hike is more likely to happen next month than it was a few weeks ago, it still might not happen.

The CME Group's FedWatch Tool currently has a 64.4 percent chance that the rate will remain at 0.50 percent. There is only a 35.6 percent chance that the rate will be increased 25 basis points to 0.75 percent. The 35.6 percent chance of an increase is actually up from 30 percent a day ago.

Even if the Fed does raise the rate, it's not a foregone conclusion that banks will increase deposit rates. As the Fed increases the fed funds rate, banks will be under pressure to increase deposit rates. Banks that are interested in growing their deposits will feel that pressure.

We look for online banks to lead the pack in raising deposit rates. Online banks such as Synchrony Bank, Sallie Mae, and Ally Bank will probably be the first to increase savings rates and money market rates. The FedWatch Tool has a 38 percent probability of a fed funds rate of 0.75 percent and a 30.7 percent probability of  1.00 percent fed funds rate by the end of 2016. A 1.00 percent fed funds rate will probably drive the top savings and money market rates towards 1.50 percent.

The last time the Fed released their own projection materials was back in March. Their forecast for the fed funds rate is for it to be at 0.90 percent at the end of 2016. The rate is also forecast to move higher in the coming years. By the end of 2017, the rate is forecast to be at 1.90 percent and at the end of 2018, the rate is forecast to be at 3.00 percent.

The Fed is also scheduled to release new projection materials after their June meeting. It will be interesting to see if the June projection materials are forecasting a higher or lower rate. When you compare the last two projections, December 2015 and March 2016, fed fund rate forecasts have been lowered by 50 basis points. PCE inflation for 2016 has also fallen from 1.9 to 1.6 percent.

Even if the Fed does increase the fed funds rate by 25 basis points, it's still unlikely one of the online banks will increase their deposit rates. If the fed funds rate is increased 25 basis points, don't expect a similar 25 basis point deposit rate increase. 5 basis points or 10 basis points will probably be the maximum we will see.

Author: Brian McKay
May 25th, 2016

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