CD Rate Trends This Week: Oct. 20

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Are certificate of deposit investors souring on the Federal Reserve?

Even though there are no mass protests at the Fed's front door, you have to wonder if there will be soon, as CD rates are scraping the floor largely thanks to the Fed’s determination to artificially sit on interest rates.

Sure, investors did see some upward movement at the high end of the CD scale. Four-year CDs rose to 2.05% from 2.01%. Five-year CDs climbed as well to 2.35% from 2.30%.

Two-year CDs also bumped up a bit, to 1.53% from 1.5%.

One-year CDs, as measured by the BankingMyWay National CD Rate Tracker, also hiked upward to 1.06% from 1.04%.

But short-term CDs didn’t fare as well. Three-month CDs fell to 0.45% from 0.46%, while six-month issues slid to 0.69% from 0.7%.

At 0.45%, the three-year CD is at its lowest levels since 1989. Six-month CDs are at 25-year lows, as are five-year CDs.

Commercial bank rates also are seeing all-time lows, at 0% to 0.25%. With a tepid economic wind at its back, the Fed isn’t showing any signs that it will hike rates this year. The even money on Wall Street suggests that the earliest the Federal Reserve will lift interest rates is March 2010 — and even then the Fed might only raise rates by a quarter of a point.

Such a scenario sets the table for more of the same until the end of the year, if not longer. With Federal Reserve money so cheap, banks have little incentive to raise capital through the issuance of CDs or money market instruments (or bank savings and checking accounts, for that matter).

So, what economic developments might trigger an uptick in rates? For starters, an improvement in job numbers would be a big help. As long as 10% (at least) of the U.S. workforce is sidelined, that puts a big dent in consumer spending, thus keeping the economy in low gear. So watch out for unemployment rates. Even a downtick to 9% would send a signal that the economy is on the mend, thus giving the Fed a good reason to raise interest rates.

Another key factor would be rising U.S. home prices. According to the Case-Schiller housing index, home prices had declined for 33 straight months through May 2009. But the last two monthly readings show that the decline in home prices has stopped. If that decline is done for good, then the economy would likely be on the mend, thus creating a good environment to raise interest rates.

No doubt, these scenarios fall under the “if only” category. But right now, that’s all CD investors can hang their hats on.

Remember, while you shop for the best rates, give BankingMyWay a shot. That will get you on the fast lane to the best CD rates out on the marketplace.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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