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Updated on Thursday, February 6, 2020
While we can’t predict exactly what 2020 has in store for us, it’s safe to say the days of Federal Reserve rate hikes are behind us. After three rate cuts in 2019, the Fed has left savers in limbo as the latest monetary policy pause continues.
Banks and credit unions continue to cut their rates across the board, on both deposit accounts and lending products. This doesn’t bode well for CDs yields, as they tend to respond rapidly and hew closely to the Fed’s policy changes. However, a few banks have chosen to set their rates higher than those of competitors.
The Fed rate outlook for 2020
From what we can see at the beginning of 2020, it looks as though the federal funds rate range will remain around 1.50% to 1.75% for some time. The Fed has given no sign that it is ready to make a move in either direction as of yet, although it’s safe to say a rate hike isn’t on the table. It would take a precise set of conditions for the Fed to materially reassess their patient stance; until those arrive, we wait.
With the December 2019 Fed dot plot as an indefinite indicator, most Federal Open Market Committee (FOMC) participants envisioned the federal funds rate will stay right where it is for 2020. Only four members plotted their dots higher, indicating an infinitesimal increase to a 1.75% to 2.00% range this year.
However, when looking at the Fed dot plot, keep in mind that it is not a concrete prediction of where the federal funds rate will go. Rather, each individual committee member’s projection is based on the data they currently have. As fresher data comes in over the year, the dot plot is sure to change.
What we can expect from CD rates in 2020
On the whole, 2020 CD rates have been a mixed bag so far. Many institutions are still making small reductions, while others remain stagnant.
On a positive note, however, several institutions have gone against the grain and raised CD yields over recent months. Most notably, Marcus by Goldman Sachs has increased a few of its CD rates by 10 basis points (bps) each. Other leading leaders, including Salem Five Direct, Rising Bank and Advancial Credit Union, have increased their own rates slightly as well.
We can certainly expect this trend to continue among a few outliers, rather than a nationwide upswing.
CDs vs. savings accounts
Savings accounts aren’t seeing the kind of recovery that CDs have, unfortunately.
“The Fed’s rate cut on Oct. 30 is still having an effect on online savings and money market accounts,” said Ken Tumin, founder of LendingTree-owned DepositAccounts.com. Indeed, even rate leaders continue to drop their savings account rates incrementally.
Tumin warns that rate cuts may have been spread over a month or two, so we may not have seen the last of these cuts yet. This assumes the Fed itself doesn’t deliver another rate cut.
The highest interest rate on a liquid savings account as of this writing is 0.65% APY, offered by Fitness Bank’s Fitness Savings account0.50% APY, offered by Customers Bank’s Ascent Money Market Savings account. Savings account rates at popular online banks are generally hovering around 1.70% APY.
Meanwhile, there are a few CDs available nationally at around 3.00% APY for 5-year and 7-year terms. 1-year CDs aren’t too far behind, where the highest is currently 2.25% APY as of this writing.
What’s next for deposit account rates?
The U.S. economy is off to a solid start in 2020. Economic growth continues at a moderate pace, with a strong labor market, solid job gains, record-low unemployment and moderate household spending on our side. According to the Fed, the economy’s weaker points include weak business fixed investment and exports.
The economic outlook is marred, however, by outside forces. Slowing global growth, trade negotiations, Brexit and the coronavirus outbreak have all been cited as risks to the health of the U.S. economy. The Fed assures it will continue to monitor these developments, and take action if necessary to continue our own economic expansion. Until then, we wait amongst falling deposit rates for the Fed’s signal.