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CD rates and the Fed

By Sheyna Steiner ·
Wednesday, June 22, 2011
Posted: 3 pm ET

The Federal Open Market Committee met today for the fourth time this year. Unsurprisingly, rates were unchanged and that means continuing bad news for CD rates.

At the end of this month, the Fed's $600 billion bond-buying program known as QE2 will come to an end. But the Federal Reserve will continue their policy of reinvesting principal payments from securities holdings.

It's not entirely improbable that rates could get a slight lift from the end of QE2, but according to Bankrate's Dr. Don, savers shouldn't expect any miracles on July 1. It may be a couple of months before the end of QE2 filters out to CD rates.

"Rates are so unnaturally low right now. I think with the finishing up of QE2, or without an announcement that there will be QE3, that will loosen rates up a little bit," says Donald Cummings, managing director of Blue Haven Capital Management.

"We're in a really steep yield curve environment right now. And I have to believe that we'll see a bear flattening of the curve too. It will be the short end that goes up and flattens the curve a little bit," he says.

In the press conference following the meeting, Fed chairman Ben Bernanke did indicate that they believe the recent economic slowdown is temporary and barring unforeseen complications, the Fed will begin reducing the size of the balance sheet before contemplating an increase in short-term interest rates.

A signal that they are going to begin reducing the balance sheet should definitely have a salutary effect on rates but according to Adolfo Laurenti, deputy chief economist at Mesirow Financial, we likely won't see that until October or November or even December.

Plus one has to consider, "with the U.S. government long all the fixed income products that they are long, they really don't want rates to go up until they have emptied their inventory," Cummings says.

What do you think?

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J Christopher
June 23, 2011 at 9:04 pm

I'm disappointed but not surprised by the Fed's continued commitment of maintaining virtually non-existent interest rates.