Higher CD Rates Expected in 2014 as Federal Reserve Ends QE and Increases Fed Funds Rate

After 5 years of declining CD rates we might actually see higher CD rates in 2014. Several things have to come to pass in order for interest rates to increase next year but they are looking more and more likely to happen. Of course the biggest part of the equation is the economy and the pace of economic growth.

GDP growth the past year has been inconsistent at times with the fastest pace of growth at 4.1 percent in the first quarter of 2012 and the slowest rate of growth at 0.4 percent in the fourth quarter of 2012. First quarter 2013 growth snapped back to 2.5 percent but growth expectations for the entire 2013 is at 1.6 percent, according to The Conference Board's Global Economic Outlook 2013, January 2013 update.

Estimates for GDP growth will probably be revised higher throughout 2013, and the quicker the pace of growth the more likely bank CD rates will move higher sooner than later. Long term bond yields have already moved much higher the last three weeks as the markets sense an end to the Federal Reserve's loose monetary policies.

The Federal Reserve has been on a quest to drive long term interest rates down to spur economic growth. By keeping the federal funds rate just above zero percent and purchasing mortgage-backed securities and long term bonds, the Fed has succeed in driving interest rates to record lows. Mortgage rates, bond yields, savings rates, money market rates and CD rates have all hit record lows the past year.

30 year mortgage rates hit record lows of 3.27 percent in 2013 and 30 year bond yields hit a record low of 2.53 percent in 2012. Shorter term interest rates have also been driven to record lows by the Fed. Average 5 year CD rates at banks are under 2.00 percent and the highest CD rates on 1 year certificates of deposit are just above 1.00 percent.

The Fed's purchasing of long term bonds and mortgage backed securities is likely to end sometime late in 2013 if economic conditions continue to improve. The Fed has also stated that they plan to increase the fed funds rate when the unemployment rate falls below 6.5 percent. The unemployment rate for April fell 0.1 percent to 7.5 percent, only 1 percent higher than the point at which the Fed will increase the fed funds rate.

While the Fed purchasing will stop in 2013, the unemployment rate won't fall to 6.5 percent until sometime in 2014. We will probably see a rate at that level in the second quarter of 2014. At that point, the Fed will increase the fed funds rate to 0.50 percent or even 1.00 percent. A fed funds rate at 1.00 percent will mean 1 year CD rates will move to the 1.75 percent to 2.00 percent range, a nice increase from the highest rates right now of 1.04 percent.

You can find the best national CD rates by searching our rate tables here: cdrates.monitorbankrates.com.