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Over the past few years, deposit account interest rates have become more competitive than we’ve seen in ages. The best online savings accounts have reached around 2.50% APY, and we were seeing some 5-year CDs above 3%.
The start of 2019 put somewhat of a damper on these gains, although you can still find great high-yield savings accounts and competitive CD rates. Nevertheless, interest rates aren’t going up at the pace they were last year, and we’re even seeing many industry leaders starting to cut their rates, particularly on CDs.
So why are interest rates going up one day and down the next? Read on for more.
Are interest rates going up or down?
After a long stretch of rate hikes, market interest rates on the whole are pausing. Savings account rates haven’t taken a drastic downturn, and highly competitive rates are still available. Money market accounts have similarly leveled out.
But certificates of deposit (CDs) haven’t been quite as safe. Like with savings accounts, many banks have paused CD rate hikes. Some, including many industry leaders, have begun to decrease their CD rates over the past few months. Fear not, these cuts aren’t anything drastic, with rates only dropping by a tenth of a percentage point on average.
The Federal Reserve and interest rates
Let’s get into the nitty-gritty. Interest rates follow the path blazed by the federal funds rate, which is determined by the Federal Open Market Committee (FOMC). This is the rate at which depository institutions, like banks and credit unions, exchange federal funds held at Federal Reserve Banks with each other.
So when the Fed was raising the federal funds rate, banks and credit unions were able to follow suit and increase their rates, resulting in some great savings opportunities. That’s why we saw interest rates rise steadily as the Fed consistently raised the federal funds rate from December 2015 through December 2018.
Below, you can see the changes in average rates for savings accounts, 1-year CDs and 5-year CDs corresponding to the federal funds rate changes.
Of course, the opposite must also be true. When the Fed hits pause, or even cuts the federal funds rate, banks respond in kind. The Fed chose to keep the federal funds rate unchanged at its January 2019 meeting, we immediately saw some banks cut back a bit on their competitiveness.
Deposit accounts aren’t the only products impacted by changes in Fed policy. While a downward rate trend isn’t great for savings accounts, it can be a relief for consumers trying to get loans. So if you’re angling to get a mortgage, now might be the time.
What to expect from interest rates in the future
Due to the recent trade turbulence involving China and Mexico, it appears the Fed could be pushed to cut rates sooner rather than later. A Fed rate cut would prompt banks to accelerate their rates reductions.
As we mentioned, savings and money market account interest rates have held their own during the pause in the first half of 2019. But “if the Fed reduces rates, however, those cuts will definitely come,” warns Ken Tumin, founder and editor of DepositAccounts, which, like MagnifyMoney, is owned by LendingTree.
To use historical rates as a reference, Tumin looked at online savings account data from 2007, when the Fed first cut rates after the 2004-2006 rate hike cycle. He found that after the Fed cut the federal funds rate by 50 basis points, the average APY of the 20 top online savings and money market accounts fell by 25 basis points within a month.
“Out of those 20 accounts, 16 had rate cuts,” Tumin said. “So I would expect a similar situation to occur if the Fed does a rate cut this time around.”
As for CD rates, they will likely keep falling. A lot of the recent CD rate cuts are related to future expectations about the economy and interest rates, Tumin noted. So since it looks like at least one Fed rate cut is becoming more and more necessary due to a weakening economy, banks will likely cut their CD rates — especially long-term CDs.
When will interest rates start rising again?
In this climate, it’s natural to wonder if interest rates will return to the upswing again any time soon. For now, it’s unclear when interest rates will go up again. Talk of recession has hovered over our heads since December, dampening the economic outlook. Currently, Fed funds futures — financial contracts that indicate the market’s opinion of where the federal funds rate will go — are showing an outlook of a rate cut by the end of 2019, even by July. If these predictions come true, we’ll see rates go down before they go back up.
As for when that will be, we’ll first have to see better-than-expected economic reports on unemployment, gross domestic product (GDP) and inflation. Tumin notes that if we were to get more strong, positive data, then we’d see Treasury yields rise, especially longer-term maturities, which could shift the Fed back toward rate-hike mode. Then we could start to see a return to higher CD rates.
The Fed’s most recent Summary of Economic Projections (SEP), released in March, indicated a median projected federal funds rate of 2.6% for 2020. As this is higher than the current upper federal funds rate limit of 2.5%, this could mean at least one federal funds rate hike next year and — hopefully — deposit account interest rate hikes as well.