Federal Reserve Chairman Ben Bernanke was at it again, issuing a reality check to optimists still giddy over last Friday’s reduction in the U.S. unemployment number (from 10.2% to 10%).
In the process, Bernanke tossed a pitcher of cold water on certificate of deposit rates, which continue to lose ground as prospects of economic recovery ebb and flow on a daily basis.
In testimony to Congress (where his own job is on the line at his confirmation hearings), Bernanke said that the U.S. economy was straining against "formidable headwinds." To fight high unemployment and a sick credit and consumer market, the Federal Reserve would keep interest rates low "for an extended period" to make sure that credit was cheap, and that money would continue to flow through the U.S. economy.
Those comments didn’t sit well with banks, who are between a rock and a hard place when it comes to CD rates. With the government basically giving money away to banks (since interest rates are so low), banks don’t feel the need to pump up CD rates to generate more revenue. But if the economy does improve, and more investors flee to higher-reward stocks and stock mutual funds, banks would likely have to raise CD raise rates to stay competitive.That’s why bank investors had a spring in their collective steps this weekend — surely a reduction in the U.S. unemployment rate was a sign that the economy was on the mend. After all, jobs are a lagging indicator — one of the last pegs to fall into place as an economic rebound commences.
But a full-fledged recovery hasn't happened yet and by pledging to keep rates low, the Federal Reserve has quashed any short-term momentum in the CD rate market.
Last week’s numbers bear that out. As measured by the BankingMyWay.com Weekly CD Rate Tracker, rates were lower right down the track.