What We Learned Today from the Fed
As was overwhelmingly expected for weeks, the Federal Reserve announced this afternoon that it is maintaining the federal funds rate at its current level.1 This is the third meeting in a row ending with a rate hold, after last being raised on July 26.
Since March 2022, the Fed has implemented 11 rate increases in its fight to tame decades-high inflation. Its rate-hike campaign has raised the fed funds rate by a cumulative 5.25%, taking it to its highest level since 2001.
Like previous announcements, today's statement indicated that until the committee feels confident inflation will come down to the Fed's target of 2%—and will reliably stay near that level—it will keep its options open for an additional rate increase if needed.
Federal Reserve Chair Jerome Powell said: "While (committee) participants do not view it as likely to be appropriate to raise interest rates further, neither do they want to take the possibility off the table."
Still, other data presented today signals that the rate hikes are very likely over. Every three months, the Fed's announcement includes an eagerly anticipated "dot plot." This chart represents each committee member as a dot (no names attached) and uses those dots to show where each member believes the fed funds rate will be at the end of 2024, 2025, and so on.
In the dot plot released today, we learned that no Fed members are currently predicting another increase in 2024. Also, they are now projecting more rate cuts in 2024 than they predicted in the September dot plot. The median expectation is now three rate cuts by the end of 2024, totaling a reduction of 0.75%. Among the 19 committee members, only about 10% expect the federal funds rate to hold steady throughout 2024, while roughly 80% expect two to four cuts.
As we always caution, these are just predictions based on what the Fed members know right now. The economic landscape can change quickly, which means the Fed can change course from previous projections. It's also worth noting that Fed members' predictions on rate cuts are for next year as a whole, with no signals on when in 2024 they expect the first cut to be implemented.
How the Fed Affects the Best CD Rates
The Federal Reserve's decisions about the federal funds rate have a direct impact on the interest that banks and credit unions are willing to pay for savings, money market, and certificate of deposit (CD) accounts. When banks and credit unions expect the Fed to raise the fed funds rate, many will raise their consumer deposit rates as well. The converse is true when they expect the Fed will lower rates.
As a result of the Fed raising its benchmark rate 5.25% since March 2022, the best CD rates have skyrocketed. At one point, the highest rate on a nationally available certificate had reached 6.50% APY, with several certificates on the market in October and November paying above 6.00%. However, rates have since come down from those historic highs, with a current top rate of 5.76% APY.
In a rate-hold situation like we have now, predicting CD rates becomes a "wait and see" game—watching for clues from the economy and comments from Fed members on how long rates will stay at current levels, or show hints of an impending rate cut. The Fed's next rate announcement will be made Jan. 31, 2024.
Advice for CD Shoppers
Based on what we see in today's dot plot, the odds of another rate hike—and the related odds of any CD rate increases—have now gotten quite slim. And in fact, many banks and credit unions have already been lowering rates, with almost all of the CD rate changes we've tracked over the past month being downward movements. So it looks almost certain the CD rate peak is behind us.
That makes it a ripe time to lock in one of today's best CD rates, as you can still earn a historically stellar return. With dozens of options paying more than 5%, you still have an abundance of great-paying options at your disposal. But those rates look likely to come down in the coming weeks and months.
