Certificate of deposit rates are settling back down across the CD spectrum.
It’s always hard to pin down the specific reason why CD rates might fall in a given week, but the fallout from the Federal Reserve’s Open Markets Committee meeting last week is definitely still reverberating across the bank interest rate landscape.
Not seeing the rate of growth it wanted, the Open Markets Committee once again opted to keep interest rates in check (between 0.0% and 0.25%), in the hopes of freeing up more money to grow the economy. This could be the case for a while, as the Fed offered a telling line in its post-meeting statement on Sept. 21.
Interest rates, says the Fed, should be “exceptionally low levels for the federal funds rate for an extended period.”
In English, that means the Fed still views the U.S. economy as weak. Therefore, it will not only keep rates low to grease the skids for stronger economic growth, but will leave the door open for more aggressive stimulus measures as well, such as going back to its plan of buying up U.S. government securities (which would tamp down long-term interest rates).
The financial markets have already factored in another period of low interest rates. There’s an index called the fed funds futures that predicts the long-term trend on the federal funds rate. Right now, the futures index shows a 19.8% likelihood that the Federal Reserve will boost interest rates by June 2011. That’s down from a 26.9% prediction from the week prior to the Fed’s Open Markets Committee meeting last week.
That’s obviously not good news for CD rate investors. Outside of a handful of credit unions, few financial institutions are offering long-term (five-year) CDs at rates higher than 3%. The BankingMyWay Weekly CD Rate Tracker pegs the national average for five-year CDs at a paltry 1.740%.
Clearly, there’s plenty of room for upward CD growth. But despite this month’s general upward swing in rates, few on Wall Street are betting that will happen.