Fed Locks In Low Rates: What Should CD Investors Do?

Fed Locks In Low Rates: What Should CD Investors Do?

NEW YORK (MainStreet) -- Certificate of deposit investors likely knew all along what the Federal Reserve made official Tuesday: rates will stay near zero for two more years, adding to the jail sentence CD investors have already been serving since 2009.

In a nutshell, the Fed said it would keep the target range for the fed funds rate at 0.5%-0.25% through 2013. That move cements the U.S Prime Rate at 3.25%. Economists said it was history in the making – never before had the Fed assigned a specific timetable to its interest rate policy.

The move was widely viewed on Wall Street as an attempt at clarity, with Ben Bernanke & Co. stamping a timeline on U.S. monetary policy. The tactic worked – at least in the short term, as the stock market skyrocketed by 429 points, and the bond market saw benchmark 10-year Treasury yields fall to a tepid 2.18%.

Unfortunately, certificate of deposit rates are tied to the prime interest rate, which is controlled by the Federal Reserve.

The U.S. Prime Rate is a commonly used short-term interest rate in the banking system of the United States. All types of American lending institutions (traditional banks, credit unions, etc.) use the U.S. Prime Rate as an index or foundation rate for pricing various short-term loan products. The Prime Rate is consistent because banks want to offer businesses and consumers loan products that are both profitable and competitive. A consistent U.S. Prime Rate also makes it easier and more efficient for individuals and businesses to compare similar loan products offered by competing banks.

Now Wall Street commentators are saying that the Fed basically is driving investors out of bonds and into stocks, and that’s killing interest rate investors.

On CNBC’s Mad Money last night, host Jim Cramer said the chairman of the Federal Reserve Ben Bernanke had totally eliminated Treasury bonds, and by extension CDs, from the markets.

"He banned them from your portfolio unless you simply want to make no money at all," Cramer said. "He made stocks, particularly the highest growth stocks and the best yielding stocks, the most attractive pieces of paper in the financial kingdom."

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