Three Reasons Why CD Rates Are Likely to Rise

Forecasting interest rates is a notoriously risky exercise. Even so, looking at rates right now, it seems they are almost certain to rise, especially at the short end of the yield curve. Short term rates have the greatest impact on things like saving account interest rates, money market rates, and CD rates.

A rise in rates would represent the reversal of a powerful trend which has seen interest rates fall to historically low levels. So why should this reversal be expected?

1. Inflation won't cooperate indefinitely. The Consumer Price Index has been almost flat over the past year -- an extremely unusual state of affairs. In fact, 2008 was the first calendar year of negative inflation since 1954. However, since 1948, annual inflation has averaged 3.7%. Investors can accept low interest rates when there is no inflation because they still come out ahead, but once inflation shows signs of returning to normal levels, interest rates will have to rise.
2. Current CD rates are exceptionally low. 1-month CD rates are nearly 6 full percentage points below their historical average. 6-month CD rates are nearly 5 full percentage points below theirs. History does not repeat itself in an orderly fashion, but it does give some idea of what is normal for the markets. With 6-month CD rates having ranged between 1% and 18% historically, you'd have to say there is far more room for them to rise than to fall.
3. The yield curve reflects an expectation of higher rates. The yield curve represents the differences between short-term and longer-term rates. Long-term rates generally yield more, but right now that differential is especially steep. This indicates that the market as a whole expects rates to go up. Markets can be wrong, of course, but in this case this expectation seems to be a realistic assessment of the unusual short-term conditions that are keeping rates low.

With steep differences between short and long CD rates, and more variability on the horizon, consumers need to be especially vigilant about finding the best CD rates. Using Internet resources can keep consumers informed, and bring together the best CD rates from around the country for comparison.

 

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