Absolutely Impossible to Predict the Direction of Short-Term Interest Rates Now

The two most common questions that we get at BestCashCow are “which direction are interest rates going?” and “how do I position myself now if the Fed raises or lowers?”

The answer to the first question drives the second.

Never in the 14 years since this site was founded has it been so difficult to determine the direction of interest rates.

On the one hand, it is unprecedented to have an Administration that knows no legal, ethical, moral or other boundaries and which will stop at nothing to win re-election in 18 months. Trump himself, Kudlow and others will continue to direct unprecedented lobs at the Federal Reserve and Jerome Powell, its Chairman, in order to persuade them to lower rates between now and November 3, 2020.

Powell already changed the Fed’s guidance in November 2018 as a result of Presidential harassment, leading Wall Street analysts to predict that the next Fed move is to lower the Fed Funds rate from its current range of 2.25% to 2.50%.

But, Powell’s original position was that the Fed needs to bring the rate to a neutral position around 2.85% and he has recently used the absence of inflation as his grounds for stalling here. It is highly likely that any prolongation of a tariffs war with China will cause inflation, perhaps even strong inflation if there is also a rise in the price of underlying commodities. Therefore, I think it is impossible to count out the possibility of at least one Fed raise before the end of 2019.

I therefore continue to advise people to keep most of their money in savings and money market accounts and no penalty CDs. However, one-year CDs that offer rates at or above 2.80% and have early withdrawal penalties of only 3-months or less are available online and locally, and I think that they may make sense for some of the money that you know you will not need during that period. I would avoid longer-term CDs for the moment as they are not offering a significant premium over shorter term CDs.

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