Savers are in for a smoother ride after months of declines in deposit account yields.
The Federal Reserve reversed course in 2019, backtracking from the two rate hikes it originally projected and instead cutting rates three times. So far for 2020, the Fed plans to refrain from making any adjustments to its benchmark interest rate, giving savers some much needed breathing room.
Both short- and long-term CD rates have steadily fallen in 2019, but analysts expect rates to flatten in the coming months.
“I think the dust will settle and yields will stabilize after retreating much of the second half of this year,” says Greg McBride, CFA, Bankrate chief financial analyst. “But savers are still going to have to shop around and get the best yields in order to maintain the buying power of their savings.”
No rate changes this year?
The fed funds rate is the main factor impacting CD rates, says Dr. Dan Geller, president of Analyticom, a financial analytics firm. Banks and credit unions in 2019 lowered their CD yields, sometimes in anticipation of Fed rate changes.
Now that the Fed’s rate-setting committee isn’t expecting to touch rates at all in the near future — at least for the short term — savers aren’t seeing the same drops in rates that they were seeing in the summer and fall.
Rates could tick up later
As far as CD rates go, inflation also comes into play. Core inflation is 1.6 percent. By the end of 2020, it’s expected to rise slightly to 1.9 percent, driving up rates with it.
“A forecast uptick in inflation will push CD yields up slightly in the back half of the year, but it’ll be a hollow victory as most increases will trail the change in inflation,” McBride forecasts.
If the U.S. economy continues to expand and core inflation moves above 2 percent, there could be some talk of the Fed needing to start raising interest rates again, McBride says.
Of course, it’s hard to say exactly what might happen in this new year.
“There are two conflicting economic forces going into 2020,” Geller says. “On one hand, we have a robust labor market and very healthy consumer spending and consumption. So that’s one aspect. The other one on the other side is (a) declining manufacturing sector because of all the trade issues.”
CD rate predictions
According to data from Bankrate’s weekly summary, the average one-year CD yield for the week of Dec. 23 was 0.73 percent APY. The average five-year CD yield came in at 1.10 percent APY.
McBride expects the national average for the one-year CD to reach 0.8 percent APY in 2020, with the best CDs available across the country hitting the 2.3 percent APY mark. For five-year CDs, he predicts that the national average yield will move up to 1.22 percent APY, with the top nationally available accounts for the term paying 2.45 percent APY.
Geller believes we’ll see short-term CD yields in particular increasing, especially for accounts maturing in three to six months. The reason he says is simple: uncertainty.
“Depositors feel like they’d rather keep the money short or in liquid accounts in case things will not go that well — they don’t want to make a long-term commitment,” Geller says. “So, because demand is increasing for short term, we do see rates of short-term CDs starting to increase.”
Savers may be better off staying short anyway, McBride says, due to the lack of a rate premium for longer-term CDs.
[COMPARE: Best 1-year CD rates]
CDs vs. savings accounts
Competition for deposits should remain, McBride says. He believes the average savings account yield nationwide should move up slightly from 0.10 percent APY to 0.12 percent APY. Rates for high-yield savings accounts, he says, should hover around 2 percent and jump up before the end of the year to 2.25 percent APY.
As it is now, there won’t be much of a difference between savings account yields and short-term CD rates. So savers will need to consider what they’re saving for and how soon they’ll need access to their cash.