Chaos theory tells us that the slightest system disturbance can have a profound impact on future events. The simplification, called "The Butterfly Effect, even states that a minor event like a butterfly flapping its wings can cause a major disturbance like a hurricane. So could a butterfly flapping its wings increase CD rates? It doesn't seem likely, but we have to agree to the random element of forecasting CD rates. Let's take a look at what could affect CD rates.

Obama

President Obama did not inherit an easy job from his predecessor. A financial crisis that Warren Buffett called an "economic Pearl Harbor" has kept Obama very busy and very scrutinized. Despite wide support from both Democrats and Republicans on a number of key financial programs, the Obama administration's level of government spending may have long-term impacts on the future of the country. The Monday-morning quarterbacking by economists over Obama's policies may go on for decades. The deficit currently stands at $11,304,959,091,709.62. For those not good with numbers that is over $11 trillion or more than 36 thousand dollars per citizen. A deficit this large requires a significant portion of the U.S. budget to finance. The Obama legacy, his fault or not, may be the growth of the deficit to intolerable levels. If the deficit does continue to spiral upwards, most economists forecast that interest rates will have to increase.

The Economy

Is there any tonic for an out-of-control debt? Sustained economic growth may be one. The government's balance sheet is tied inexorably to the economy now that the government is a shareholder in many of the nation's largest financial institutions. Economic recovery could lead the government to get paid back (or even profit?) from the myriad of loans, bailouts, and government takeovers that have occurred. Economic recovery, in particular job growth, will also increase tax revenues. As recently as the Clinton administration the United States ran a surplus, probably the best way to survive our national debt crisis is through a period of balanced budgets. Politically this may be impossible right now, but eventually push will come to shove.

CDs

Admist this chaos, savers would like to know where CD rates are heading? Because the Fed has pulled out all the stops on keeping rates low already, it seems unlikely that rates will go any lower. A period of deflation could prompt banks to lower their rates further, but for the economic and political reasons listed above inflation seems the more likely scenario. Already the difference in yield between the 2-year Treasury Note and the 10-year Treasury Note has increased to record levels. This steepening of the yield curve tells us that CD rates for terms of over two years should be heading up. The Fed has pulled a lot of rabbits out of their hat in the past, but even buying $600 billion in mortgage securities and Treasury bonds has not prevented the recent increase of Treasury yields. 

CD buyers can expect higher rates, but perhaps not right away. Whatever the level of Treasury yields, banks will still respond to their own funding needs when setting their deposit rates. So when should a CD buyer expect to find the 5% or 6% of yesteryear? If we get the expected increase in inflation and moderate economic improvement, it could be sooner than many expect. A reasonable forecast would be 5% on a 5-year CD in a year. If this happens a CD buyer who parks their money for a year at 2.80% and then buys a higher yielding CD would come ahead of the CD buyer who locks-in a longer-term CD today. In many ways this is a guessing game where your guess may be as good as a nobel laureate. But if your guess involves longer-term CD rates increasing over the next few years, then you have Obama and the economy as potential allies.