We are must likely going to experience a falling interest rate environment in the coming months. The Federal Reserve’s Open Market Committee cut the federal funds rate 50 basis points again. A falling federal funds rate usually means that the interest rates on bank products, including CDs and money market accounts will drop and follow suit. But, CD rates haven’t fallen nearly as much as we would expect.

The typical pricing that CDs would follow in this market is being squarely impacted by the credit crunch. The competition among banks for customers and bank’s deposit growth desires are the causes most frequently discussed on these pages. In general, CD rates don’t fluctuate as much as Treasury securities and other short term interest bearing financial products. However, short-term rates should start to reflect the lower rate environment and these interest rates should come down.

In addition, bank CDs clearly gain from the panic in the equities and commodity markets. Some experts have been quoted as saying this will keep pressure on rates staying high. Maybe if it was corn or soybeans, but the demand for CDs should work inversely on interest rates, similar to any other interest bearing bond. As demand rises interest rate goes down. Especially since the banking industry should have less to worry about regarding the rates being offered during a time of high demand. In fact, during this crisis there is certainly the mostly unspoken fact that many banks which offer the more competitive rates are those banks in rather eager need of new funds. If demand for bank products stays elevated, these banks will not have the need to offer the outlier rates or high CD rates that are now offering.

Do to the stock markets disastrous year there is an abundance of money sitting on the sideline looking for place to invest. A significant amount of that money is making its way into bank savings products. If the market rebounds, funds may flow in the opposite direction and CD rates would most likely rise to stay competitive. Unfortunately, the growing government debt may lead to outrageous inflation which erases all of the above. Today’s advice is simple. Stay informed about the opportunities in the interest rate sensitive markets and make an informed choice on your investment decisions.

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