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Remember Certificates of Deposit During Fed Rate Cuts

Posted By Jim On 05/23/2008 @ 9:21 am In Banking,Personal Finance | 1 Comment

If you think interest rates are falling, put some of your savings into a CD. Since last August (2007), the Federal Reserve, haunted by the spectre of a slowing economy, had been hacking and slashing the Federal Funds and Discount rates [3]. During that run, and until just recently, the prevailing attitude on Wall Street was that the Fed was going to continue cutting the rate until the threat of future inflation balanced out the threat of a recession. With this last twenty five basis point cut at the end of April, the prevailing attitude changed. Analysts now believe the Fed will stand pat and potentially even raise rates in the future.

During those rate cuts, all of the high interest online banks [4] dropped their savings account interest rates dramatically. Since January of this year, the interest rate on E*Trade’s online savings account fell from 4.95% to 3.01% (only to increase, just recently, to 3.15%). ING Direct account holders saw their rates fall from 4.10% to their current rate of 3.00%. If you were able to purchase a CD at the prevailing higher yield online savings account rates for even a year, you’d be sitting pretty on those funds right now and that’s why CDs become popular during a falling interest rate environment.

This is where you say: “Jim, I’m not an idiot, I know that if the rates are going lower then I want to lock in good rates.” Yes, you are not an idiot but the point is I didn’t lock in any funds in CDs, except for my laddered emergency fund [5], because I didn’t recognize that I should have (or at least should have considered it). It wasn’t an error of judgment but one of ignorance.

Everyone knew rates were going to be cut but not everyone realized they should’ve considered putting a little bit away in certificates of deposit. (I can confidently say that because I know I didn’t) So, the next time you think rates are going to stagnate or fall, lock a little away in CDs.


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[2] Email: mailto:?subject=http://www.bargaineering.com/articles/remember-certificates-of-deposit-during-fed-rate-cuts.html

[3] hacking and slashing the Federal Funds and Discount rates: http://www.newyorkfed.org/markets/statistics/dlyrates/fedrate.html

[4] high interest online banks: http://www.bargaineering.com/articles/top-5-online-banks-savings-or-checking-accounts.html

[5] laddered emergency fund: http://www.bargaineering.com/articles/laddering-your-emergency-fund.html

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