Saturday, November 22, 2008

CD Rates and Fed Funds Rates

I've been reluctant to pontificate in the realm of personal finance lately--market conditions are simply too volatile now for me to feel comfortable placing any big bets and I'd be even more hesitant advising others to take specific positions. There is, however, one bet I am willing to make, and it isn't even a bet. CD rates are high right now, especially considering how low the Fed funds rate is and that prices are actually falling, evidenced by the 1% decline in the CPI in October.
With the Fed funds rate currently at 1%, rates on CDs offered by major banks are a steal. With the probability of deep recession, it may be 24 months or longer before we see a recovery and in the meantime, prices are likely to continue falling as aggregate demand contracts and the interest rate will remain low. Locking in 4% with a bank like ING makes a lot of sense, especially given that the equity markets have offered a whopping -46% return YTD. And 4% isn't too shabby given that the Fed is almost gauranteed to drop the interbank rate by 50 basis points following their December policy meeting.

Comparing the rates available to consumers shown below with what banks can get in the overnight market, locking in an FDIC insured CD seems like a decent idea.