April showers may have brought May flowers, but they didn’t bring decent certificate of deposit rates last month.
CD rates for May were down for the 19th month in a row, offering bank investors scant hope that the situation will improve anytime soon.
The primary problem is that interest rates remain low — and will stay there as long as the economy struggles to climb out of recession. The Federal Reserve seems grimly determined to keep rates as low as possible, for as long as possible. That’s because the Fed wants to spur lending and credit, to give individuals and businesses the liquidity they need to spend money and fuel economic momentum.
The jury is still out on the success of that mission. But the Fed isn’t expected to raise rates anytime soon, and in a low rate environment, bank CD investors can expect more of the same this summer. After that, some smart people believe rates will rise — people like PIMCO CEO Bill Gross, who recently predicted that interest rates would rise for “an extended climb.”
That may come to pass (it’s already starting overseas, as the London Interbank Offered Rate, or LIBOR, was up to a 10-month high last week), but if higher rates are to arrive in the U.S., they’ll face some serious economic obstacles.
The first such hurdle is the European debt picture. With Greece’s economy on the brink, and other Euro countries like Spain and Portugal not far behind, investors are leaving Europe in droves. That’s good for the U.S. financial markets — much of the European money is landing here in the states — but bad for CD investors. Why’s that? Because most of the overseas money is pouring into U.S. fixed income markets, thus driving Treasury prices higher, and interest rates lower, as high demand pushes bank rates downward.