With the exception of five-year certificates of deposit, CD rates are in decline once again for the week, a downward trend that is causing leading economists to openly wonder whether banks know something that the rest of us don’t — that the economy is heading back into a "double dip" recession.
One of the biggest proponents of the double dip decline is Nouriel Roubini, a New York University business school professor and chairman of Roubini Global Economics. Roubini was one of the early predictors of the great economic meltdown of the late 2000s, and now he’s back saying there is even more trouble ahead.
Writing for Forbes.com on March 11, Roubini says that one only needs to look at the latest batch of economic indicators to see that the economy is once again threatening to sink under a sea of red ink, lousy consumer sentiment and a weak housing sector.
Consumer confidence, based on the Michigan survey, has tanked. On the real estate front, new home sales are collapsing again, existing home sales are also falling sharply and construction activity (both residential and commercial) is sharply down. Durable goods orders are down, and initial claims for unemployment benefits remain stubbornly high (way above the 400,000 mark). Real disposable income for the fourth quarter has been revised downward while real disposable income (before transfers) for January was negative again.
If Roubini is right — and he’s been right before — then expect CD rates to ramp downward as more investors flee higher-risk stocks in a slowing economy. Banks don’t feel obliged to raise bank interest rates when demand is high. In fact, they don’t have to — investors will grin and bear low bank rates if it means preserving — and not losing — their investment capital.
Roubini’s call is echoed by the Federal Reserve. It predicts low bank rates, along with low inflation, for most of 2010. Of course, the Federal Reserve has a hand in what banks can offer consumers in CD rates. During the past 15 months, the Fed has made money cheap for banks and creditors. It’s opened the vault and allowed financial institutions to borrow money from the Fed at essentially 0% interest. Seizing that opportunity, banks borrow from the Federal Reserve at 0% and turn around and lend it to private and commercial borrowers at 3% or even 5%. Banks can do this all day, every day — so where is the incentive for banks to pump up their CD rates? Frankly, there isn't any.