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The Federal Reserve Raises Fed Funds Rate to 2.25% to 2.50%, Indicates 2019 Will Be Slower

The Federal Reserve, acting today in its final 2018 meeting, voted to raise the Fed Funds rate by 25 basis points.  The Fed funds target rate is now 2.25% to 2.50%. 

This hike represents the fourth hike of 2018, and since Jerome Powell became Chairman of the Federal Reserve.   (In December 2017, the Fed Funds rate was raised to 1.25% to 1.50% in Janet Yellin’s final meeting as Fed Reserve Chair.)

We continue to slowly see a normalization of interest rates in an effort to curb liquidity as the economy has moved over the last nine years from a dramatic recession to fast expansion.  The Fed’s continued hawkish actions are not appreciated by all, but they make sense.   While the stock market has come down dramatically over the last few weeks, easy money is no longer required to extend the US expansion.  Normalization is necessary to fight incipient inflation, to avoid a Japan scenario where interest rates get stuck at or near zero for generations, and to provide the Fed with the ability to lower rates later when and if necessary to counter a shock to the economic system.

The pace of future rate hikes is likely to be dramatically slower.  Today's Federal Reserve consensus forecast guided to two more quarter-point hikes in 2019, and one hike in 2020.  The long-term neutral target rate has been reduced from 3.00% to 2.80% (although a 2020 hike will bring the Fed a quarter point above neutral).

We think it is possible that the Fed could be forced by outside pressures to become more dovish more quickly.  Chairman Powell indicated in November that he could pair back rate increases when he tried to appease Trump by saying that the Federal Reserve was already just below neutral.  It is now also possible that a tremendously unstable President may try to remove Jay Powell and replace him with a more dovish Chairman.

So How Do you Play this Latest Fed Funds Move?

First, online savings rates are higher now than they were at the beginning of 2018.   As a result, there is today much more of an incentive to get your cash out of banks paying virtually nothing than there was at the beginning of the year.   If you still have cash in savings or money market accounts that is earning close to zero, this is a good time to move your assets to either an online bank on a local bank or credit union near you with a competitive interest rate.  

Since the number of further rate increases and their pace is not particularly certain, one-year CDs are more compelling versus savings than they have been in a long time.   At the beginning of 2018, the average premium in one-year CDs was about 45 basis points over savings, and that premium recently widened to 77 basis points (see the third graph in our rate analysis).

Rates are rising on longer term CDs but we see very little premium in the average 5-year CD rate over the average 1-year CD rate (see the third graph in our rate analysis).   Therefore, we would strongly recommend CD purchasers lock into only a one-year CD and taking another look at longer-term CDs when it comes due in December 2019. 

Finally, when the Federal Reserve raises the Fed funds rate, as it did today, you also often see an immediate move in the prime lending rate offered by most major banks.  We expect that most banks will immediately raise their prime lending rate by 25 basis points which will have an equally immediate flow-through to credit card rates and auto loan rates.   If you have been considering locking into a home equity loan or a new fixed rate mortgage, you have probably missed the ideal time, but you may want to consider doing so before rates go higher.

Robinhood Offering 3% APY Savings & Checking in Bold Shot Across the Bow Of Established Banks, but No FDIC Insurance

Rate information contained on this page may have changed. Please find latest savings rates.

As of this morning, Robinhood is offering a 3% APY savings & checking rate on its website.   The account is advertised as being completely without fees and providing access to 75,000 ATMs.

In an earlier article, we suggested that there was no need to rush into neobanks for their service.   However, anybody who has followed the savings and money market space for the last decade knows that it has been impossible to obtain anything close to 3% APY on your liquid cash.

As of the date of this publication, the best nationally online savings rate stands at 2.50%.   See all the best online savings rates here.   You may, however, be able to obtain a better rate at a brick-and-mortar bank or a credit union near you.

In fact, even if you are willing to tie up your money for 12-months, you still cannot get 3% on a one-year Certificate of Deposit on a nationally-available online account, although 3% may be obtainable at your location from local banks and credit unions.

Let’s be very clear: Robinhood is not FDIC-insured.

Robinhood notes that it is insured by the SIPC.   The SIPC is not just another 4-letter acronym with virtually identical protection (like perhaps the NCUA that covers credit unions).   It is the Securities Investor Protection Corporation and the coverage is very different from FDIC insurance.

The SIPC says that it ensures cash in a brokerage account to $250,000 (and securities to $500,000).   SIPC coverage is designed to protect the account should the brokerage fail and the assets not be present in the account of the other side of a failure.   It often takes time for brokerage assets to be identified and sorted out in the event of a failure and it could be a lot of time.   On the other hand, the FDIC steps in and restores bank accounts to their full value at another institution the following day (so you have no meaningful loss of liquidity and no sleepless nights as long as you stay within FDIC limits).  

Another important difference between FDIC insurance and SIPC coverage is that the latter is significantly more limited.   SIPC coverage attaches to you in each “separate capacity” which differs from “ownership class” at the FDIC.   The terminology difference may seem trivial but it actually has severe implications because the SIPC insurance is much more limited.   Here are two ways in which the difference is most evident:

First, a husband and wife opening a joint account at a bank are insured in that account up to $500,000.   With a joint brokerage account, their combined cash is only protected to at most $250,000.

Second, your total securities are protected up to $500,000 by SIPC insurance across all brokerages.  While retirement accounts are a separate capacity, if we were to experience a failure at several brokerages, you would be limiting your SIPC coverage at other institutions by having an account in your personal capacity at Robinhood.   

You can learn more about FDIC insurance and the coverage it provides here.

Robinhood seems to be founded by millennials and it is aimed at millennials with moderate assets.   However, if you aren’t a millennial or are one with assets in other places, you’ll likely be able to sleep better by seeking out the best online savings rate you can find at an FDIC-insured online bank.   See those rates here.

In Spite of Uncertainty, Savings and CD Rates Are Rising into December 2018 FOMC Meeting

Rate information contained on this page may have changed. Please find latest savings rates.

The last couple of weeks have been fraught with uncertainty in global markets.   In the US, we ended November with Fed Chairman Jay Powell moving to appease a President in a speech before the NY Economic Club by suggesting that a “neutral” Fed Funds rate lies just above current rates and removing a 3% + target.

Subsequently, we have seen an escalation in trade tensions with China with the arrest in Canada of Meng Wanzhou, Huawei’s CFO, and a realization that Mueller now has the evidence to expose Trump’s suspect enterprise when his final report is released.    Financial markets have gone into a tailspin.

Whereas the Federal Reserve is still predicted to raise the Fed Funds rate to a 2.25-to-2.50% target at its next meeting, the language in its statement will almost certainly mirror Powell’s statement in front of the NY Economic Club which could cause the rise that we have seen in savings and CD rates to stop or to slow.

In advance of each Fed move this year, we have seen a rise in savings and CD rates for two weeks in anticipation of the move (with some banks trailing to raise their rates subsequently).   With all of this uncertain and a likely change articulated in Federal Reserve policy, one might expect banks less eager to move to raise rates going into the FOMC meeting on December 18 and 19, 2018.   Contrary to this expectation, the most aggressive online banks have already raised savings rates this past week (Popular raised to 2.36% and My Savings Direct to 2.40%).   We expect other online banks will be forced to match this move in order to stay competitive going into the Fed move.

See the best online savings today rates here.

We are also seeing local banks and local credit unions continue to aggressively raise their savings and money market rates.

See the best savings and money market rates at banks near you here.

See what credit unions near you are paying on cash here.

We are also seeing short-term CD rates advance around the anticipated December rate increase, again in spite of Powell's statement that we are now just below target.   Over the last week, we have seen several increases in online one-year CD rates with several banks now offering over 2.85%.

Local banks near you may offer even higher 1-year rates, as may local credit unions.

Interest rate anxiety around whether the Fed is going to continue to raise or pause may increase following the Fed’s December statement.   The average spread between online savings and online 1-year CDs now stands at 77 basis points which is the widest it has been in a decade (see the third graph on BestCashCow's rate analysis page).   It may be peaking around here.  

No Need to Rush Into Neo-Banks

Unlike manufacturers, banks don’t make things. Unlike retailers, banks don’t sell things. Banks make money in three ways - the fees they charge for services, the interest they charge on the loans they make, and the income they generate from investments. They fund the loans and investments from the deposits they gather from people like you and me - or from loans, bonds and equity investments in the bank itself. In return for these funds, depositors get interest paid on their savings, lenders are paid principal and interest, bondholders get income and stockholders get dividends - as well as equity appreciation.

Enter the neo-banks. These financial services firms look to lure consumers away from the large incumbent institutions like Chase and Wells Fargo. They offer free-checking and mobile apps to manage your account. These challenger banks, such as Chime, Simple and Moven, offer a wide variety of technology tools to help manage your financial life - particularly your spending. They are driven, due to the ever-increasing amount of time we spend on our mobile devices, to find ways to get consumers to interact with their financial services app and collect data on that usage.

These companies are very good at technology. However, neo-banks aren’t, by their own admission, banks.

  • “We’re not a bank, we’re a technology company that provides online banking services, and partners with an FDIC-insured bank, BBVA Compass.” - from Simple’s website.
  • “That means we don’t profit off of you. We profit with you: every time you use your Chime debit card, we earn a small amount from Visa (paid by the merchant).” - from Chime’s website
  • “Moven is the world’s first real-time mobile money tool. Moven is a financial service provider. We partner with CBW Bank, along with other vendors, to provide digital banking services.” - from Moven’s website

BestCashCow helps savers make better decisions in their financial lives by helping them find the best savings rates at banks across the country. Though Simple has offered special rates that compete with the incumbents, at this point in time, most neo-banks are not in the position to offer competitive rates or the range of banking services desired by the majority of consumers.

Your banking decision should be based on a number of factors - customer service, access, convenience, financial stability and, of course, an offer of competitive interest rates.  Though these new mobile players succeed at delivering convenience and access through technology, the reality is their size, and the fact that they are not banks, limits their offerings and calls into question their long-term financial stability.

You’ll undoubtedly hear more about neo-banks, as the Treasury’s Office of the Comptroller of the Currency (the “OCC”) continues to explore special purpose national bank charters for fintech companies. The future may bring opportunities to get access to new innovations in bank technology.    But, for now, if you’re unhappy with your current bank, you probably will be better off finding one of the incumbents that is offering a better rate, as well as better technology and service, than you’re getting now.

December 2018 Update – Five Nationally Available Online Savings And CD Accounts that Recently Raised their Rates

Rate information contained on this page may have changed. Please find latest savings rates.

Savings and CD rates continued to firm in November.   And, while much was made in the last few days concerning Fed Chairman Jay Powell’s unprecedented equivocation to presidential harassment, the Fed will likely raise the Fed Funds rate to 2.25% to 2.50% in December.   Here are 5 savings and CD accounts that recenrly raised their rates:

  1. MySavingsDirect – 2.35% Savings Rate, No Minimum Balance

MySavingsDirect is a division of Emigrant Bank, a large New York-based bank.   While we have cautioned in our newsletter last month (hyperlink) that Emigrant has a customer-unfriendly history of locking rates down in one subsidiary and becoming competitive in another, we also note that for the time being they continue to be competitive with this brand, having raised the rate 10 basis points in mid-November.   Customer reviews indicate that while MySavingsDirect accounts are easy to find and easy to open, ACH transfers from some institutions, including Morgan Stanley and Merrill Lynch, are not possible. 

2.   CIT Bank Savings Builder – 2.25%, Requires $25,000 Balance or a $100 minimum plus addition of $100 a month

CIT Bank is not a newcomer to the online savings game.   While they have not been consistently competitive with their online savings rates, their recent actions indicate a strong initiative to keep their rates above all other well-recognized names.   In November, they raised the rate on the savings builder account by 10 basis points to 2.25%.   There are two ways to qualify for the savings builder account – either to maintain a $25,000 balance or to open the account with $100 and deposit at least $100 during each monthly measurement period (between the 4th day of each month until the 4th day of the following month).   We think CIT is likely to remain competitive and named it one of our best bets for 2019 (hyperlnk).

See and compare all of the best online savings rates here. 

3.   Ally Bank – 2.25% No Penalty CD.   Requires $25,000.    

We have been a fan of Ally’s No Penalty CD’s for some time and have encouraged those depositors with over $25,000 to take a look in prior monthly updates.

We also recently wrote about No Penalty CDs and the opportunity that they present here (

Ally raised the rate on this No Penalty product twice in November.   Since this product can be terminated easily, those invested in it can quickly move to the higher rate each time it is raised.  

See and compare all of the best special CD rates here.

We have recommended caution around long-term CDs for some time.   However, if the Federal Reserve is going to be tempering its moves in 2019, short term CDs will become interesting.    

4.   Live Oak Bank – 2.85% 1-Year CD, $2,500 Minimum

Live Oak Bank is a small North Carolina bank that entered the online banking marketplace earlier in 2018.   They have not been a consistent competitive player – they have not raised their online savings rate as fast as many competitors, and they have from time to time lowered CD rates.   However, at the time of this publication, their 1-year CD rate stands at 2.85% - a rate that is not only well above the more recognized online banks, but that we think has very little risk.

Check out the best 1-year CD rates here.

5.   Virtualbank – 3.06 2-Year CD, $10,000 Minimum

We’d be a little bit more cautious about 2-year CDs.   VirtualBank does not have uniformly good customer reviews on BestCashCow, but they recently raised their 2-year CD rate to 3.06% which now stands as the top 2-year rate on BestCashCow’s 2-Year online CD rate table.   Depending on where you live, you may find still higher 2-year rates at banks and credit unions near you.   We don’t believe that savings and CD rates are going down anytime soon, but if believe otherwise, this one might be worth a look.

Have a great month and Happy Holidays.

Money Is On Sale

If you turn on the TV, open the Sunday newspaper, or log on to anything, you’ll see that while the holiday season is about family and friends, it is also about savings money and getting the best deals (when spending money).

What is being overlooked is that you can also get great deals now on savings money.   For the first time in a decade, online banks, brick-and-mortar banks, and credit unions are all competing hard for your cold, hard cash.

Over the last couple of months, we see not just promotional rates but a campaign of attractive incentives competing for your hard-earned deposit dollars.  Ally recently offered depositors bringing new cash a 1% bonus up to $1,000 (that promotion has now ended).

The Federal Reserve will have raised interest rates four times in 2018, and may raise them two or three more times in 2019.    As banks (and credit unions) review their 2019 deposit goals, the “sales” are vigorous and ongoing and likely to continue.

The sales are in savings rates.   You can find them on BestCashCow’s online savings page.    Be sure to check rates at local banks and local credit unions as well.    You’ll find that many smaller and less well-known institutions are also running sales too. 

Sales are also in CD rates (where some 1-year rates are now pushing 3%).  The especially pronounced sales in long-term CD rates, are especially impressive, where many local banks are offering 5-year CD rates that look and feel astronomical compared with what the public has been conditioned to seeing over the last decade.  Be sure also to check BestCashCow’s list of special CDs.   (BestCashCow continues to recommend extreme caution signing up CDs longer than one-year).   

Sales are real today.  The special deals on interest bearing accounts and deposit products can generate 5 times, 10 times, and, in a few cases, 20 times the national average rates.  With rates as amazing as those highlighted on BestCashCow, you need to ask yourself why one would continue to let Chase, Citibank, Wells Fargo, Bank of America and others take your money for nothing now?