The last initial Fed rate hike occurred on June 30, 2004, when the Fed hiked the funds rate by 0.25 from 1.00 to 1.25 percent. The initial rate hike came when the national average rate for all deposits was 1.63 percent compared to 0.28 percent today.
Here is what happened then, and what to expect now:
Long-term and mid-term CDs were quick to respond. They increased about 10 bps following the initial-hike, which in our case means December 17. However, since deposit rates were higher in 2004, we project that the “day after” increase is likely to be between 3 to 5 bps in the national average of long-term and mid-term CDs.
It took about a month before short-term CDs reacted to the hike in the Fed funds rate, and even then, the increase was moderate – about 3 bps in the national average. We project a 1 to 2 bps increase in the national average of short-term CDs sometime in the beginning of 2016.
Checking, Savings and MM accounts remained flat for two months after the initial Fed rate hike. Only in the third and fourth month after the initial Fed rate hike did savings and MM account rates started increasing by about 1 to 2 bps nationally. We expect this scenario to repeat itself this time around.
We are already seeing some tendency towards our projection in anticipation for the December rate hike. In the last 60 days, the national average rate for the 5-year CD increased by 1 bps to 0.79, and 1 bps for the 4-year CD to 0.61. Keep in mind that for the national average rate to increase even 1 bps it means that most institutions have increased their rates.
Stay on top of these changes with Deposits Dynamics. Deposits Dynamics is the only scientifically-based forecast that incorporates a behavioral predictor to increase the accuracy of the projection. It features rate and balance forecast of all major deposit accounts for the next 30, 60 and 90 days.