2014 Interest Rate Forecast: Low Rates for Savers, Higher Rates on Mortgages
Since the second quarter of 2013, higher long term bond yields and higher mortgage rates have been in the headlines. 10 year Treasury yields have moved up 100 basis points from a low of 1.60 percent in 2013 to yesterday's close of 2.70 percent. Fixed conforming mortgage rates have also moved 100 basis points higher on both 30 year and 15 year mortgage loans.
Some Banks Increase Savings Rates and Other Deposit Rates
While some interest rates have been moving up, others have not. Savers continue to miss out on rising rates because deposit rates haven't budged at all the past year. Granted, there have been some banks increasing their savings rates, CD rates, and money market rates but overall the majority of banks and credit unions haven't increased rates.
The majority of financial institutions are not expected to increase their deposit rates for one reason only - the fed funds rate. Deposit rates, unlike bond rates and mortgage rates, are tied to the federal funds rate. The Federal Reserve sets the federal funds rate based on unemployment and the expected inflation rate.
For the past 5 years, the Fed has kept the fed funds rate near zero percent because the unemployment rate is high and the outlook for inflation is low. A low fed funds rate helps foster growth which lowers the unemployment rate. The Fed's policy of keep the fed funds rate near zero percent has forced deposit rates down to record lows.
Record Low Average Savings Account Rates, MMA Rates and CD Rates
National average deposit rates have been at or near historical lows for years now. To give you a perspective of how low rates are these days, the FDIC's national average savings account rate is at a paltry 0.08 percent this week. The national average money market rate isn't much higher at 0.12 percent and 1 year bank CD rates are only averaging 0.20 percent.
While average savings rates are at record lows, the best savings rates available are much higher than the averages but still low historically speaking. Currently, the highest savings account rates are just under 1.00 percent at 0.95 percent. The best money market rates are slightly below that at 0.90 percent and the best CD rates are slightly above those rates at 1.04 percent.
Low Deposit Rates Hurt Retiree Income but Help Homeowners
These low deposit rates have been a hardship for retires who rely on interest income to help fund their retirement. 1.00 percent deposit rates won't earn you much interest, even on a $1 million nest egg. For example, a $1 million account earning 1 percent (compounded monthly) equals $10,045.96 in interest. A $1 million nest egg, earning a 5 percent rate give you an annual return of $51,691.90 in income.
Low mortgage rates have been welcome news for homeowners who financed their home purchase. Low mortgage rates have helped the housing market recover from the worst bust since the Great Depression. A relative of mine refinanced their mortgage last year from a 30 year loan to a 15 year loan with an incredibly low rate of 2.75 percent. As a result, they'll end up saving over $400,000 in mortgage interest payments over the life of the loan.
When Will Deposit Rates Increase?
Exactly when will deposit rates increase? We have been asking that question for years now. Until recently, the Fed was leading us to believe the fed funds rate will be increased when the unemployment rate falls below 6.5 percent. The current unemployment rate is at 6.6 percent but the economy is still on shaky ground. As a result, the Fed has since changed their view on when the fed funds rate should be increased.
For the past several months, the Fed has stated a 6.5 percent unemployment rate shouldn't be viewed as a target for a higher fed funds rate. Now that the Fed has "decoupled" the unemployment rate to a higher fed funds rate, when will the rate be increased? In December, the Fed released forecasts for economic growth, inflation, and when the fed funds rate would be.
A majority of Fed Committee participants believe there will be a need for "policy firming" sometime in 2015. Policy firming is Fedspeak for a higher fed funds rate. So now the answer to the question, "When will deposit rates finally go higher?" is...2015.
Mortgage Rates Have Already Increased from Record Lows
While deposit rates are still at or near record lows, the same can't be said for mortgage rates. The low point for mortgage rates was over a year ago when average 30 year mortgage rates hit a record low of 3.27 percent. 30 year mortgage rates today are more than 1.00 percent higher averaging 4.33 percent.
Average mortgage rates will continue to move higher in 2014 and are forecasted to be about 75 basis points higher than current levels by the end of the year. The Mortgage Bankers Association has forecasted average 30 year mortgage rates to increase to 5.00 percent and move slightly above 5.00 percent in 2015.
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