CD Rates Will Increase Sometime in the Next Year, Don’t Lock Into A Long Term Low Rate CD

Heading into the final month of 2013, we close out another year of dismally low CD rates. Until this past month, it seemed that bank CD rates and all other deposit rates would start increasing next year when the Federal Reserve increased the federal funds.

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Since December 2012, the Federal Open Market Committee (FOMC), has stated time and again that they would keep the fed funds rate near zero percent until the unemployment rate falls below 6.5 percent. This past month, the Fed has started backing off of that policy statement so there's no telling when they will increase the fed funds rate and as a result, when CD rates will move higher.

Federal Reserve Backs Off 6.5 Percent Unemployment Rate Threshold

Fed Vice Chair Janet Yellen, who is also the nominee to succeed the current Fed Chairman Ben Bernanke, said the Fed's policy was likely to stay loose (meaning a zero percent fed funds rate) "long after" one of the thresholds is crossed.

Ben Bernanke also hinted at a change in policy, "It is also important to note that the thresholds are not triggers." Bernanke recently stated that rates could stay at rock bottom "well after" the 6.5 percent unemployment threshold was crossed.  In the past year, Janet Yellen has suggested waiting until the unemployment rate falls to 5.5 percent before increasing the fed funds rate. Now it appears the Fed doesn't want to commit to a set unemployment rate to increase the fed funds rate.

When Will the Fed Increase the Federal Funds Rate?

Now that the 6.5 percent unemployment rate isn't the threshold that will send rates higher, when will rates increase? Rates will move higher either when there is "full employment" (an unemployment rate of 5.5 percent), or a higher inflation rate. The latter is less likely since deflation has been a big concern over the past several years and the current inflation rate is at a mere 1.7 percent.

If the long term outlook for inflation does move above the Fed's 2 percent target, interest rates would move higher. The Fed would have to increase the fed funds rate quickly to stay ahead of the inflation curve. With the current rate near zero percent, the increases would be sharp and fast.

Just to get to a more neutral point where the Fed isn't stimulating the economy or slowing growth, the fed funds rate would have to be between 2 and 3 percent.

1 Year CD Rates Will Increase above 3.00 Percent Within a Year

Fast forward to the fourth quarter of 2014 and hopefully the unemployment rate will be closer to 5.5 percent and inflation will be higher than current levels. This would mean 1 year CD rates will be above 3.00 percent, which is considerably higher than current rates. Right now, the highest 1 year CD rates in our database are at 1.04 percent with an APY of 1.05 percent.

If you have certificates of deposit maturing, don't renew into new CD account terms longer than 1 year. With rates expected to finally start moving higher by the end of 2014, you wouldn't want to lock into a longer term CD.

Make sure to stay on top of the maturity dates of your CD accounts so your bank doesn't automatically roll your funds back into a new CD. This is especially important if you have an account of 1 year or more maturing because your money will end up back in a new CD with the same term.

Author: Brian McKay
December 3rd, 2013

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