May 2024 Fed Meeting: Key Takeaways

The Federal Open Market Committee (FOMC) held the federal funds rate steady for the sixth straight time at the end of its two-day policy meeting May 1. The benchmark rate has remained in the target range of 5.25% to 5.50% since July 2023.

In a statement after the meeting, the Fed noted the lack of further progress toward its 2% inflation objective.

The Fed repeated that it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.”

However, the Fed said in the statement that “economic activity has continued to expand at a solid pace,” and “job gains have remained strong.”

The Federal Reserve also said that in June, it will slow the pace at which it is reducing its balance sheet, a process known as quantitative tightening. This is one of the tools the Fed uses to fight inflation by removing liquidity, or money, from financial markets.

What is the federal funds rate and its effect on deposit account rates?

The federal funds rate is the key interest rate that banks charge each other for overnight loans. It’s a benchmark rate that influences how much you pay to borrow and how much you’re paid to save.

A high federal funds rate results in high borrowing costs for consumers and businesses, and that tends to help reduce inflation. The higher loan rates banks are charging also encourages them to raise deposit rates, but a high federal funds rate does not guarantee a high deposit rate.

Other factors, such as competition and loan demand, can affect a bank’s decision on deposit rates. As a result, most banks set their deposit rates to only a small percentage of the federal funds rate.

Online banks typically offer high-yield savings accounts with deposit rates much closer to the federal funds rate. They are often willing to pay higher rates because they have lower overhead costs compared with brick-and-mortar banks.

A few online savings accounts and short-term CDs have matched or exceeded the federal funds rate, but most online banks have kept their deposit rates well below the federal funds rate in the last year.

What is my take on the Fed keeping rates steady?

The Fed highlighting “lack of further progress” on inflation at its May policy meeting suggests it is prepared to wait as long as necessary to cut rates.

Powell said in a press conference after the meeting that “it’s unlikely that the next policy move would be a hike.”

This could mean that the Fed may cut rates only once this year or even hold off until 2025.

I’m still worried that high deposit rates could end quickly if another financial crisis or recession hits. Even though many economists are forecasting economic growth for the remainder of 2024, the highly inverted yield curve is a worrisome sign based on history that a recession is coming. The lag between the inverted yield curve and the start of a recession may be long, and that may make it easy to dismiss the odds of a recession.

After experiencing two financial crises that have led to the Fed slashing rates to near zero, I have learned not to take high rates for granted. They can disappear quickly.

Treasury yield changes

FOMC policy decisions and signals from FOMC meetings can lead to changes in Treasury yields, and Treasury yield changes can influence CD rates. A review of Treasury yield changes from the March meeting to the May meeting offers insights into CD rate trends.

Since the March FOMC meeting, most Treasury yields had substantial gains as firmer-than-expected inflation data pushed out market expectations on Fed rate cuts. Treasurys with maturities from two to 10 years had the largest yield gains.

After the May FOMC meeting, most Treasury yields had significant declines. This might be related to the Fed’s announcement about the slowing pace of the central bank’s quantitative tightening program. The market appears to be interpreting this as an easing policy action even though Federal Reserve Chair Jerome Powell said it wasn’t.

The following yields are from the Department of the Treasury’s Daily Treasury Par Yield Curve Rates website.

• March 20 (last meeting) → April 30 → May 1
• 1 month: 5.50% → 5.48% → 5.47%
• 3 months: 5.47% → 5.46% → 5.46%
• 6 months: 5.36% → 5.44% → 5.43%
• 1 year: 5.01% → 5.25% → 5.21%
• 2 years: 4.59% → 5.04% → 4.96%
• 5 years: 4.25% → 4.72% → 4.64%
• 10 years: 4.27% → 4.69% → 4.63%
• 30 years: 4.45% → 4.79% → 4.74%

My take on deposit rates

Banks have been slow to react as firmer-than-expected inflation data continues to be released and Fed rate cuts are pushed out. As market expectations have changed, banks haven’t been quick to end or reverse rate cuts that began in January.

You can see this response by looking at the average yield of online one-year CDs in 2024 from 10 well-established online banks. The average peaked in January at 5.35%.

The average yield dropped 32 basis points in January and February, when Fed rate cuts were pushed out to spring. The average only fell by nine basis points in March, and in April, the average held steady. As the expected Fed rate cuts get pushed further out, the banks have only now started to end their rate cuts.

Overall, the market changed dramatically with a “higher for longer” expectation on interest rates that began last fall. That drove up Treasury yields to their highest levels of this rate cycle — and this affected CD rates, but they did not rise as much as I had anticipated. Also, many of the top CD rates didn’t last long as the “higher for longer” expectation weakened earlier this year.

Based on trends of the last nine months, I don’t think we will see banks offer new highs on their CD rates this year. We may see a few banks being aggressive with rates, but we won’t see widespread rate hikes similar to ones that popped up in the fall.

Northern Bank Direct was one of the banks that recently became aggressive with CD rates but has since backed off. In April, it introduced a market-leading one-year CD rate of 5.60% annual percentage yield. But it didn’t last long, and the APY has since fallen to 5.30%.

It’s possible that inflation may start to rise again as it did in 2022 and the Fed could consider additional rate increases, which would affect deposit rates. But the odds of that scenario remain low.

Strategies for savers to maximize cash yield

In the last year, savers who bought short-term CDs or kept their funds in online high-yield savings accounts likely earned more interest than those who chose long-term CDs. It’s possible that could also be the case over the next year.

In my January FOMC meeting review, I covered how best to use traditional and other types of CDs when interest rates may fall. I provided strategies designed to perform well regardless of how interest rates evolve. Always hedge your bets because no one knows for certain how interest rates will evolve.

When is the next Fed meeting?

Here is the FOMC’s calendar of scheduled meetings for the rest of 2024. Meetings in June, September and December will include releases of the Summary of Economic Projections. Included with these dates are the odds that the federal funds rate target range will be lower than today’s target range.

These odds are based on the Fed Funds futures market via the CME FedWatch Tool as of May 1, 2024.