Rates on certificates of deposit compete with other fixed-income options of like duration namely Treasuries. Longer-term CDs, just as with longer-term Treasuries, often move in advance of the Federal Open Market Committee if economic conditions are such that a rate change is expected. Shorter-term CDs and money market accounts are more likely to move soon after the Fed makes a rate change.
How soon could it affect you? |
Short-term CDs and MMAs will move soon; longer-term investments are harder to predict.
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When rates are dropping, it's not a good idea for savers to postpone fixed-income purchases, hoping the trend will reverse. On the other hand, plenty of caution is warranted if you believe we'll be moving into a rising rate environment in the near future, because if you buy longer-term maturities, you could get stuck with lower rates unnecessarily.
“Focus on building cash reserves.”
Let your time horizon and your cash needs dictate the maturities you buy.
Conclusion
The economy may take a long time to get back on its feet. Focusing on building cash reserves can help avoid having to sell stock at the wrong time or having to tap retirement accounts prematurely. It takes a bit of homework and, perhaps, a little inconvenience to open accounts at institutions offering the best return on your money, but it's worth it. |
Fed announcement: June 24, 2009
