In an interview with The New York Times (Stock Quote: NYT) that appeared in the December 25, 2009 edition of the paper, William H. Gross, co-chief investment officer of the Pacific Investment management Company (more commonly known as Pimco), let the cat out of the bag for bank interest rate investors.
Not only is Wall Street not on your side, but your government isn’t, either. “What the average citizen doesn’t explicitly understand is that a significant part of the government’s plan to repair the financial system and the economy is to pay savers nothing and allow damaged financial institutions to earn a nice, guaranteed spread,” said Gross. “It’s capitalism, I guess, but it’s not to be applauded.”
What’s worse, Gross is going against the grain of many economists by predicting that bank rates won’t be heading north anytime soon – and maybe well into April, 2011.
“What the futures market is telling me,” Mr. Gross said, “is that in April 2011, these savers that are currently earning nothing will be earning 1.25 percent.”
What Gross is saying isn’t actually alarming, if you’ve been following the strange Kabuki dance between Washington and Wall Street. What it boils down to is this: the Federal Reserve basically spent 2009 offering free money to banks. With interest rates to banks at 0%-to-1.25%, financial institutions gorged themselves on free government cash.
That set up a chain of events that led banks to ignore interest rate investors and reward them with, among other things, higher certificate of deposit rates. Why should banks play ball with customers? They’re getting all the money they need from Uncle Sam, so the incentive to raise capital by offering higher CD rates just didn’t – and still doesn’t – exist.
That’s why three-month CD rates were down about 35% for the year, and six-month CD’s were of by over 60%. One-year rates slid by about 80%; and two-year CD’s dropped by roughly the same amount. Five-year CD’s didn’t fare much better, sliding 60% for 2009.