Fed Shoots the Fed Funds Rate

The Fed put a bullet in the fed funds rate that dropped the fed funds to the floor, the federal Reserve has announced a reduction in the target to 0.00-0.25%.  As many economist and analysts are now openly discussing, the fed funds has always been a target rate.  The fed using the Federal Open market Committee to try and pressure the actual fed funds rate to meet the target.  If we look at the feds release for the effective fed funds rate for the week ending December 12, 2008 we can see that it stood at 0.13%, clearly below the previous 1.00% target interest rate.  It has generally been true that the fed funds target rate is a lagging indicator.  The effective rate often moves well before the fed announces the target rate.

In the announcement provided by the Federal Open Market Committee stated that, “Since the Committee’s last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined.  Financial markets remain quite strained and credit conditions tight.  Overall, the outlook for economic activity has weakened further… Meanwhile, inflationary pressures have diminished appreciably…the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.”

Clearly, low interest rates are here to stay for sometime.  Inflation is subdued as evidenced by today’s release of the CPI figures, which were unchanged from the previous month excluding energy.  With the energy component, the CPI dropped 1.7%!  The fed statement that emphasized that the low levels of the fed funds rate will remain in place for sometime will certainly support the prediction of low interest rates well into 2009.

Based on the stunning information released today, there is an anomaly in bank CD rates.  There is an anomaly in the top CD rates across all terms.

The three largest U.S. states are California, Texas and New York.  As a sampling, here are some select bank rates.

In California;
Imperial Capital Bank offers an interest rate of 4.00% APY on their one year bank CD. 
Rabobank N.A. offers an interest rate of 4.07% APY on their one year CD.
Santa Barbara Bank & Trust has a five year CD that yields 5.00%.

In Texas;
Founders Bank has a 14 month CD that yields an interest rate of 4.28% APY. 
La Jolla Bank, which has offices in California and Dallas, has a one year CD with an interest rate of 3.85% APY and a five year bank CD with an interest rate of 4.70% APY.

In New York;
Indus American Bank offers an interest rate of 4.00% APY on their 7 month term CD.
Capital One Bank is at 4.00% interest rate on an 18 month bank CD.  Cap One also promotes a five year CD with an interest rate of 5.00 APY.

These rates are subject to change without notice and were verified on December 16, 2008 after the fed announcement.  These interest rates and yields will not last.  It would be unusual to see spreads between the fed funds rate and CD rates of this magnitude continue for any measurable length of time.

This entry was posted on Tuesday, December 16th, 2008 at 4:23 pm 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.