Lock In Now Before It's Too Late

I’ve been shopping for brokered certificates of deposit, and the rates between one-year and five-year CDs aren’t a whole lot different. Rates at my broker range from 2.4% for one-year to 2.65% for five, with two- and three-year rates in between.

My first inclination was to stay short. Why lock up my money for five years when I can get nearly the same rate for one, two, or three years? What if rates go up in the meantime?

Fat chance. Given the Federal Reserve’s past behavior, the odds of that happening are pretty slim, if nonexistent. It may make more sense to lock up your money – if you don’t want to risk it in the stock or bond market – for as long as possible now.

With all of the betting now on the Fed cutting – not raising – interest rates this year, market interest rates are only likely to go down from here, not up. Despite its recent track record of quick monetary policy reversals in the face of market volatility, shifting from a restrictive policy to a more accommodative one – i.e., lower interest rates – just makes the Fed more comfortable. Other than savers – who most people with any influence ignore – everyone loves low rates, and if nothing else the Fed wants to be loved.

The old expression used to be, “Don’t Fight the Fed.” Now that expression has been turned on its head. There’s probably a sign in the Fed’s executive lunch room now that reads, “Don’t Fight the Market.”

Indeed, pressure on the Fed to lower interest rates has gone beyond mere verbal coercion from President Trump and Wall Street. Now Fed policy looks too restrictive on a quantitative basis. The numbers don’t lie.

The last time the Fed changed its benchmark federal funds rate was back in December when it raised its target range to 2.25% to 2.50%. At that time, the Fed had already started to backtrack on its plan to start “normalizing” – i.e., raising – interest rates, but felt compelled to go through with the hike because it had already fully prepped the markets for such a move, although it indicated that might be the last one for a while. Not going through with the hike might have been more disruptive than actually doing it.

Since then, of course, the markets have moved sharply in the opposite direction, to the point where the fed funds rate looks way too high.

According to the St. Louis Fed, the effective fed funds rate today stands at 2.39%. By contrast, yields on U.S. Treasury securities due longer than one year are a lot lower than that.

Maturities between two and five years were trading last Friday at or below 1.80%, while seven-year notes were trading below 1.95%. The benchmark 10-year note, meanwhile, has fallen well below 2.10%.

That’s a pretty strong argument for the Fed to cut its target rate, just to keep it in sync with prevailing market rates. It’s also a strong argument to lock in a relatively long-term savings rate.

The simple fact is that, since the global financial crisis, the Fed – no matter who’s the chair, whether it’s Janet Yellen or Jerome Powell – just would prefer not to raise rates. And there always seems to be some rationale – whether it’s supposedly low inflation, the tariff war with China, Brexit or no Brexit, a tick downward in economic growth, a government shutdown, whatever – to argue against monetary tightening. Raising rates just isn’t a popular position.

Fortunately for her, there was little pressure on Yellen to do so. The economy during the Obama years was always too weak – just above stall speed – to justify raising rates, which was probably just fine with her, and everyone else. Over the last two years, however, that position has become a lot less tenable, with GDP growing at a fairly stable – and apparently sustainable – 3% or more. So Powell has had to make tougher decisions, I think while facing a lot more criticism no matter what he does. But hey, that’s why he’s being paid the big bucks.

The endpoint of all this is that going forward; the Fed is simply not going to go through the pretense of trying to navigate between a too restrictive and a too accommodative monetary policy. From now on, it’s easy money all the way.

I look for the Fed to cut rates as soon as its next meeting June 18-19, and possibly cut them again later this year – and keep them there, or move them even lower over the next few years. So if you want to lock in a half decent savings rate over the next several years while protecting against market volatility, now’s the time to do it.

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George Yacik
INO.com Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

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