Unemployment Rate Below 6.5 Percent Will Send CD Rates Higher

The Federal Open Market Committee released a statement after their January meeting that gives hope to higher CD rates before the end of 2015. Until recently, the FOMC's policy was to keep the fed funds rate near zero percent until the end of 2015, or until economic conditions warrant higher rates.

In the January press release on monetary policy the Committee said, "In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remained above 6-1/2 percent."




This is the first time the FOMC has publicly acknowledged economic policy is directly tied to a particular unemployment rate. The January unemployment rate ticked up from 7.8 percent to 7.9 percent. The good news, however, is the rate could fall below 6.5 percent before the end of 2015, which is the FOMC's prediction date.

Once the rate falls below 6.5 percent, the fed will lighten up on stimulating the economy by possibly increasing the fed funds rate. Once the fed funds rate moves higher, banks will follow suit by increasing interest rates on certificates of deposit, savings accounts, etc. With the best CD rates right now at 1.04 percent for 12 month certificates of deposit, higher CD rates will be welcome news.

GDP growth would have to be better than the 4th quarter 2012 contraction of 0.1 percent for that to happen. Current predictions are for growth of 2 percent in the first quarter of 2013. Monthly job creation would have to rise above 250,000 a month to make a dent in the unemployment rate.

Monthly job gains in 2012 were recently increased to show gains of 181,000, so let's hope the positive news continues into 2013. We feel growth will take off once the budget issues are figured out in Washington D.C. and a deal is made on deficient reductions. The next two months will be critical to where interest rates will head.
 
Author: Brian McKay
February 7th, 2013
Posted in: CD Rates