For certificate of deposit investors, Halloween came too early this week.
Former Federal Reserve Chairman Paul Volcker gave an audience of students at Boston College the scary news on Monday that low inflation will be with us for a while.
“Inflation is not a problem right now,” said Volcker, “it won’t be a problem next year, it won’t be a problem for several years.”
Volcker is one of those Washington insiders who knows what our current economic policy makers know. Call it a “trial balloon” or Volcker pushing the White House’s message that inflation isn’t a threat. But Volcker’s call for investors to rely on “price stability” to promote a “strong economy” is like a DEFCON 5 alarm for CD investors, who will continue to see lower rates if inflation remains low.
Here’s why: With prices and wages low, leaders want to keep interest rates down so individuals and businesses have easier access to credit. A good argument can be made that this strategy hasn’t worked too well so far, though, as the long economic slide plods sideways, at best.
But it’s the policy the Federal Reserve is sticking with, as evidenced by its recently announced plan to buy up to $2 trillion in government bonds (expect the announcement of a down payment on that program on Nov. 3 when the Fed’s Open Markets Committee meets next). That strategy is geared toward keeping interest rates down, and stock, bond and commodity prices up.
The other piece of news that could impact CD rates in the short term is the price of single-family homes. Case-Shiller reports today that the average residential home price fell 0.2% in 20 major American cities in August. All told, prices fell in 15 of the 20 cities that Case-Shiller studied.
Slow growth in the U.S. housing market is another sign that the economy is not out of the doldrums, no matter what the politicians are telling us. With home values down, American spend less, and that’s not good for economic growth. It’s also another key in keeping interest rates low, with Americans' pocketbooks so tight.