CD Interest Rates September 24, 2009

After the Fed statement Wednesday afternoon, Treasuries rallied and interest rates headed lower.  The Fed statement, as predicted, stated nothing of significance other than perhaps the Fed’s belief that inflation will remain very low.

At the close of Wednesday, the three and six month Treasury rates were unchanged at 0.11% and 0.20%.  The one year Treasury decreased by one basis point or 1/100 of a percent falling to 0.41%.  The two year Treasury was down by six basis points to 0.96%.  The five year dropped five basis points to close at 2.40%.  The ten year Treasury rate wrapped up the day at 3.44%, down two basis points for the day.

Key components in the Fed statement released yesterday included an odd contradiction.  The Fed referenced the current level of economic activity by stating, “Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.  Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales.”  The Fed statement further added that “…economic activity is likely to remain weak for a time…”  

Now, those two statements don’t appear particularly positive however, the opening sentence of the Fed press release states “…economic activity has picked up following its severe downturn.”  The Fed does not often play loosely with the facts.  One of the basic tenets of investing is not to fight the Fed.  Reading the statement it is a little hard to tell if economic activity has picked up or if economic activity has simply stabilized at a low level of production and consumption.

In the release the Fed emphasized their position on short term interest rates with this statement, “The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

The Fed statements and data can be construed as a mixed bag for bank CD investors.  The initial outlook is that bank CD rates will not be rising anytime soon.  With the fed funds rate staying low it is not likely that short term CD rates will rise with that constraint on short term rates.  However, with the inflation rate expected be low for some time, the real rate return on bank CDs ( the real rate of return is this nominal rate or posted CD interest rate less the inflation rate ) is not as poor as it appears by simply looking at the current level of CD interest rates compared their recent historical levels. 

Shopping and comparing CD rates is a fundamental exercise that must be adhered to during these conditions.  Rolling over maturing bank CDs with the same financial institution without comparing market rates is a sure fire way to get a less than optimal return on your investment.  The best CD rates and the average CD rates is quite a spread and should not be ignored.

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This entry was posted on Thursday, September 24th, 2009 at 11:06 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.