It may seem strange, but the amount of cash sitting in U.S. checking and savings accounts does influence CD yields, Mosby says. That's because money in checking and savings accounts, as with CDs, is used to fund bank lending.
Banks like using checking and savings to finance lending, especially short-term lending such as credit cards, because interest rates on those accounts are lower than on other funding sources, such as CDs.
When checking and savings balances are high, banks don't need to turn to CD deposits, which cost them more in interest. On the other hand, when checking and savings balances fall, banks have to make up the difference by attracting CD deposits, which they do by raising rates.
How it's crushing CD rates: Millions of investors spooked by the financial crisis pulled their money out of the markets and put them into FDIC-insured checking and savings accounts. Much of that money is still sitting in those accounts, providing banks plenty of money to satisfy their current needs without having to raise CD rates.
What needs to change: Uncertainty in the economy is still scaring off many investors, Mosby says. As the economy picks up speed and investors find more attractive investment options, some of the money sitting in checking and savings should empty out in search of higher returns. That in turn will force banks to seek out CD investors to make up the shortfall.