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Updated on Thursday, February 6, 2020
Over the past few years, deposit account interest rates have become more competitive than we’ve seen in ages. At their peaks, the best online savings accounts reached around 2.50% APY, and we were seeing some 5-year CDs above 3%.
The Fed’s latest rate cuts and subsequent policy pause, however, put somewhat of a damper on these gains, although you can still find solid high-yield savings accounts and competitive CD rates at online banks. Nevertheless, interest rates aren’t going up at the pace they were just a couple years ago, and we continue to see many industry leaders continue 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?
Market interest rates on the whole are either pausing or declining. Still, without monetary policy change from the Fed since October 2019, some banks are recovering and actually increasing their rates.
Savings account rates have really fallen since mid-2019, with rate leaders dropping their account rates 1% or a bit more. Of course, highly competitive rates are still available, when compared to the largely stagnant rates at big traditional banks. Money market accounts have more or less leveled out.
Certificates of deposit (CDs) have seen the most change. Like with savings accounts, many banks have slashed their CD rates across all terms. However, CDs are where we’re starting to see increases in rates at several standout banks.
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 cuts the federal funds rate, banks respond in kind. When 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. Drastic changes followed soon after when the Fed cut the federal funds rate three times between July 2019 and October 2019.
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
It is unlikely we’ll see interest rates go up much this year, if at all. The Fed’s first meeting of 2020 set the tone of continued patience regarding monetary policy, citing the need for a development that provokes a material reassessment of their outlook to consider a change.
There are also outside forces weighing on the economic outlook, namely slower global growth, trade negotiations and the recent coronavirus outbreak. Thanks to these risks, it’s more likely the Fed will find the need to cut rates before they raise them. As we’ve seen, another Fed rate cut would prompt banks to double down on their rates reductions.
To use historical rates as a reference, Ken Tumin, founder of LendingTree-owned DepositAccounts.com, 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.”
CD rates will likely keep falling in 2020. They have been dropping steadily for about a year now; only a few outliers recently recovered themselves to raise rates a few basis points. However, without a rate hike even in the cards, banks have little room or motivation to raise their rates.
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. As of February 2020, Fed funds futures — financial contracts that indicate the market’s opinion of where the federal funds rate will go — are showing a 50-50 chance of a rate cut by June 2020, and a 100% chance of a cut by December. 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 December 2019 Summary of Economic Projections (SEP) indicated a median projected federal funds rate of 1.60% for 2020. As this is within the current federal funds rate range of 1.50% – 1.75%, this doesn’t bode well for rate hike seekers. If we follow those December projections, we won’t see a rate hike until 2021.