Another Fed Cut, Which Way CD Rates

The Federal Reserve lowered short-term interest rates a half-point this week.  The benchmark federal-funds rate now stands at 1%.  The Federal Reserve and other central banks have been injecting liquidity into the financial system to keep funds available and ease credit constraints.  While some areas of the financial markets have shown improvement, credit is still tight in most parts of the financial system.  What impact will this have on bank rates?

The move by the Fed will usually precipitate a corresponding lowering by the major banks of their own lending and savings rates.  However, banks have not been moving with any speed in spreading the benefits, or consequences, of the rate cuts immediately.

The Federal Reserve is already more than a year into a rate cutting program that has been more aggressive than most market participants would have expected at this same time a year ago.  By pushing the federal-funds rate down to 1% on would expect bank CD rates to drop as well as the banks cost of funds decline.  But, throughout most of this year the list of the nation’s best CD rates is only marginally changed.  Some banks through the year of Fed cuts have even been raising rates.

Even with the rate cuts by the Fed, banks are getting more, not less desperate for depositors money.  Banks are still finding they need to compete for deposits and customers and the number one tool is to offer competitive interest rates.  In this environment it is likely that the banks in need of growth as well as those concerned about maintaining market share will keep their rates specials over 4.00%.  For many banks, high CD rates and money market account rates are used to generate enough consumer interest to keep their deposit base growing.  This will happen despite the level of the Fed Funds rate. There will be pressures for short-term interest rates to fall, but the impact is likely to be slow and uneven within the bank industry.

During any time of significant interest rate news, the best way to keep abreast of what’s going on in the CD market is to read these pages to ascertain the changes in national and local bank offers to see where the best CD rates can be found.

This entry was posted on Friday, October 31st, 2008 at 10:25 am and is filed under Money Rates. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.