Long-Term CD Rate Rise May Signal Higher Inflation
If history is any indication, the increase in rates on long-term certificates of deposit could mean higher inflation is around the corner.
Research firm Market Rates Insight provided that analysis, saying the last time inflation was on the rise was in November 2003, when the annual inflation rate stood at 1.77%. In late 2003 and into 2004, the five-year CD rate started trending up in tandem with the increase in the annual inflation rate.
“Long-term CD rates are the canary in the coal mine,” said Dan Geller, executive vice president of MRI in San Anselmo, Calif. “When banks and credit unions increase rates on long-term CDs, it is to attract long range liquidity at relatively low rates, which will improve net interest margins once inflation rises, and eventually the Fed Funds rate increases as well.”
Interest rate on the five-year CD has increased steadily over the past nine weeks from a national average of 1.54% in the first week of January, to 1.62% in early March, an increase of eight basis points, according to MRI. Geller said this increase is substantial because it represents only rates of regular CD products minus any specials, and because the increase is widespread enough to impact the national average.
In the 2003-2004 time period, the Fed Funds rate, which traditionally increases with inflation, had a lag time of about eight months after the start of the rise in inflation and CD interest rates,” Geller said. At that time, the Fed Funds rate stood at 1.25% from November 2003 to June 2004 while the annual inflation rate increased from 1.77% to 2.99% over the same time period.
“If history is going to repeat itself, we might see an increase in the Fed Funds rate later this year,” Geller said.