Employment Levels and Inflation Would Both Force CD rates to Rise in 2015

Learn Bonds, a reputable research firm, forecasts that CD rates are expected to appreciate in 2015 in line with rising Fed rates. The research firm predicts that once the Fed ends its expansionary policies; the CD rates, which have hit rock bottom this year; will start to move higher. And since the Fed has started talking about raising the Fed funds rate, experts believe that CD rates will also follow soon.

The Federal Open Market Committee (FOMC) members say that the Fed will raise its funds rate in Q4 next year. The increase in the rates would be slow at the start. But if the inflation rate rises or the unemployment level improves, the rates will appreciate at a faster rate.

Next year, employment levels in the technology sector are expected to increase significantly, but only for highly skilled and experienced individuals. On the other hand, lower skilled employees will remain unemployed. The employment rate is therefore expected to remain at the same levels next year. This would prevent significant rise in Fed funds rate.

The inflation rate, on the other hand, may cause fed funds rate to appreciate next year. The Fed forecasts that the inflation rate would reach 1.7% by 2015. This is why the Fed has decided to raise its rate next year to curtail rising inflation rates.

However, experts say that the extent of the rise in the Fed rates would depend on whether the employment levels and inflation rates perform according to the forecasts. If increase in interest rates is greater than that forecasted by the FED, we would see a greater increase in the fund rates next year. However, if the interest rates appreciated as per the expectation of the Fed, the funds rates would not appreciate that much.

Similarly, if the general employment levels in the US improve significantly, there would be a considerable increase in the Fed Funds rates. Since the CD rates are affected by the fed fund rates, we would expect a similar situation with CDs next year.

That being said, the increase in CD rates is not expected to return to pre-recessionary trends. The reason is that the employment levels and inflation rates are not expected to reach their 2007 levels for the next five years. And, if the CD rates move more than 1% next year, investors should consider moving to longer term CDs to earn higher returns.