Federal Reserve Bumps Up Rates

Happy New Year! The Federal Reserve’s Open Market Committee voted this week to increase the target Fed Funds rate by 25 basis points. This marks the ninth such increase since beginning the gradual rate rise campaign in December of 2015 and the fourth year in a row that we’ve had a little boost as we approach the New Year.

From December 2008 to December 2015, the Fed Funds rate was stuck at near zero (between zero and 0.25%). While the first quarter point bump (12/16/2015) did little to spur savings and CD rates, borrowing rates went up allowing lenders to increase their interest margins. It also served as a warning that the days of these historically low rates were numbered.

Looking at CD rates, however, the top 1 Year Rate in JRN was actually lower in December 2016 (at the time of the second increase) than it was in December 2015. Since that second move though, the Top 1 year CD rate has been moving up along side the Fed Funds rate. (See chart below.)

While the committee indicated that the pace of these increases will slow down in 2019, most participants see it hovering around 3% by the end of the year. According to the dot plot: six feel the midpoint will end up at 3.125%; five at 2.875%; four said 2.625% and the final two have it lower at just 2.325%. But as we know, these projections are subject to change with incoming data. In fact, the central tendency has dropped considerably in the September projection (from 2.9-3.4% three months ago to 2.6-3.1% now).

The 2.9-3.4% range is now the central tendency for 2020.

The top one year Jumbo CD rate has been running between 50 and 75 basis points above the midpoint, so based on current predictions, we be looking at a 4% top 1 year rate in the not too distant future. That’s a rate we haven’t seen in over a decade.

On page 7 we list the 50 community banks with the largest Jumbo CD liability as of September 30, 2018. The first bank on the list, 4-Star Apple Bank for Savings, NY bills itself as “the go-to New York bank for great rates” and it does have good rates …for the New York area. At this writing, it has a 6 month CD with an APY of 2.15% and 1 year APY at 2.50% with a minimum opening balance of just $1,000. These rates have enabled it to increase its Jumbo CD liabilities by 38% over the previous year.
Conversely, while former JRN listee 3-Star FirstBank of Puerto Rico, San Juan is listed third on page 7, its Jumbo CD liability was actually down 1.7% during the year. Of course, that will likely improve once it gets back up to 3½-Stars and re-qualifies for JRN.

Like JRN listee 5-Star Dime Community Bank out of Brooklyn, NY, for example, which increased the volume of Jumbo CDs on its books by 43% over the 12 month period. Dime is #19 on the list. You should recognize some other JRN listees as well.

As rates continue upward, and with the FDIC modernizing its categorization of certain deposits, in particular, accommodating for online deposit taking, we should be able to add more in the coming months. Stay tuned.