When Will Inflation Expectations Lift CD Rates?

Recent economic releases have increased the optimism of some market analysts about the U.S. economy, although you may have to listen or read very carefully to find the good news. The glimmers of hope are hidden in phrases like, "the pace of declining home sales has slowed" or "growth was forecast to be worse than reported." Not exactly enough to pop the champagne bottles because the recession is over, but it just might be enough to start asking the question: When will inflation creep back into the economy?

The expectation of inflation is enough to increase longer-term interest rates as measured by yields on U.S. Treasury notes and bonds. We also know that when the yields on 2-year, 3-year, and 5-year Treasury securities increase, banks are likely to increase the rates on their certificates of deposit of the same term. What's interesting is that some of the more competitive online banks who post their rates on MoneyRates.com will increase CD rates with just the strong prospect of inflation. This means we may not need to even wait for the CPI report revealing inflation before we could see an increase in CD rates from some leading online banks. The spread between the 10-year Treasury Bill and the 10-year Treasury Inflation Protected Security (TIPS) has increased to over 1.50%, marking its highest level in over seven months. This is one of the best indicators that inflation expectations are increasing. If the TIPS spread were to reach 2.5% or higher, investors expectations for inflation will have exceeded the Federal Reserve's target range. We may not be there yet, but these first hints of inflation may be good for CD rates.

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