CD Rates Hang in the Balance While Economic Indicators Waver
February 04, 2010
After having ended 2009 with a nice flourish, market interest rates faded a little in mid-January 2010, reflecting wavering confidence levels about the economic recovery. A sustained rise in bond yields would eventually influence bank rates, but the prospects for that happening soon now appear weaker than they did just at the start of the new year.
The interest rate outlook is especially important for anyone buying--or rolling over--a certificate of deposit. Not only are depositors interested in getting the strongest CD rates they can, but having a sense of the trend in interest rates helps depositors decide whether to lock up CDs for longer terms, or stay short and hope for higher interest rates on CDs in the near future. The latest doubtful signs of economic recovery only make this decision more difficult.
To give you an update on recent economic developments and their effect on bank rates, here are three widely followed economic indicators and a discussion of how each one relates to interest rates on CDs.
- Employment and CD rates. The unemployment rate remained at 10% in December 2009 according to the Bureau of Labor Statistics, and the economy continues to lose jobs. The most optimistic thing that could be said was that the rate of job losses has slowed, but the economy needs to add jobs if it is going to sustain a recovery. Currently, unemployment is roughly twice as high as it was when the recession started. There is often a lag between the start of an economic recovery and improvement in the job market, but if the latter doesn't start coming around soon, the economy could suffer a relapse. In the months ahead, look for jobs to be the key indicator of whether this recovery really gets off the ground. Without a sustainable recovery, look for CD rates to be slow to rise.
- Foreclosures and CD rates. Housing foreclosures are a persistent problem. Even with some apparent improvement in the economy, foreclosures increased in 2009--and 2008 had been a pretty bad year in its own right. Persistently high foreclosures would spell trouble for the economy at large and the banking industry in particular, and neither would be good for depositors.
- Consumer confidence and CD rates. Consumer confidence continues to be mixed, and that probably represents a realistic assessment of underlying economic conditions. Rising confidence tends to lead to rising demand for credit, which translates to higher interest rates. However, with household balance sheets under pressure and credit harder to come by, consumer confidence is unlikely to get much better until the underlying fundamentals improve--and that largely comes back to the job market.
As a general rule, a low interest rate environment would not be a good time to lock into long-term CDs. However, with prospects for rising bank rates starting to appear shaky again, moving out to a long-term CD might be the only option for getting a decent interest rate. One solution? Hedge a little by splitting your money. Consider keeping some money in short-term deposits to allow flexibility if interest rates rise but also putting some deposits into a longer-term CD to earn a better interest rate in the meantime.
