Expect certificate of deposit rates to remain low
Until the central bank takes steps to reduce asset purchases, certificate of deposit rates will remain very low. That's because CD rates are more strongly influenced by the federal funds rate, in general. Longer-term CD rates do follow Treasury yields to some extent. But for CD rates to see any significant improvement, yields on comparable Treasury securities would have to move higher and stay there.
"The mechanism that will make (CD rates rise) is that when the interest rate gets high enough, large depositors will transfer to five-year Treasury securities. When that starts happening, (banks and credit unions) will start raising rates," says Bill Hampel, senior vice president of research and policy analysis and chief economist for the Credit Union National Association.
Rates on the short end of the yield curve, CD maturities of less than one year, won't really go anywhere until the central bank starts manipulating the federal funds rate, or gets close to it.
Fixed-interest instruments that trade on a secondary market, such as bonds, are more immediately affected by Federal Reserve actions, but they also respond to economic data. The yield on the benchmark 10-year Treasury fell after the Fed's announcement Wednesday but went back up again after new economic data showed an improvement in home sales.
- By Sheyna Steiner