It’s all a confidence game these days — meaning certificate of deposit investors have to wait until consumers and businesses grow more confident about the U.S. economy before they’ll see CD rates rise significantly.
The Federal Reserve Board is certainly playing the confidence game — but not too confidently. The Board meets twice this week to discuss steps it may take to grease the skids for the U.S. economy. Those steps most likely won’t include a hike in its key interest rate — the one it charges banks to borrow money.
That shows bank investors that the Fed isn’t convinced the reeling economy is back on its feet yet. In a fragile economic recovery — most economists say that’s what we’re seeing right now — raising rates too soon could crimp the equally-fragile credit markets.
Yet there are some signs that the economy is showing slight improvement. Jobless claims are down and consumer sentiment for the past two months has inched upward. But recent signs indicate that the holiday shopping season will be a meager one for retailers, as Americans opt to plan a budget, stick to it and pay only cash to cover gift expenses this year. According to the National Retail Federation's 2009 Holiday Consumer Intentions and Actions Survey, about 71.5% of consumers will use cash or debit cards this holiday season versus 28.3% who’ll turn to plastic. That’s a 10% slide in credit card use compared to the 2008 holiday season.Then there’s the question of an "artificial recovery." In a sense, the U.S. economy is on training wheels, steadied by government handouts to banks and an increase in spending on public works projects — spending that is unsustainable and that will likely be cut significantly in 2010 (unless Congress decides to OK a second stimulus — and there is some support for such legislation in Washington).
All of these factors combine to leave the commercial prime lending rate at a rock-bottom 3.25% going forward; a rate that’s a boon to borrowers but an anchor around the neck of bank savings consumers.