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CD rates tied to fate of economy

By Claes Bell ·
Monday, April 2, 2012
Posted: 5 pm ET

The process of setting CD rates is really complicated. Bank personnel consider everything from the number of car loans people are taking out to the amount of money sitting in checking accounts to decide where to set CD rates in a given year.

But underpinning all those factors is the condition of the overall economy. If the economy improves, people will begin spending or investing their money instead of depositing it in a bank, taking out loans and doing other things that will force banks to look for money to lend out. Also, accelerating economic growth would force the Federal Reserve to take their foot off the interest-rate accelerator pedal, so to speak.

One article on had an interesting take on this principle. Richard Barrington looked at the relationship between Chinese steel demand and CDs. Think that link is tenuous? Barrington speculates that a plateau in Chinese demand for steel could auger an economic slowdown in China, which could have a cooling effect on the U.S. economy. If that happens, he writes, it could force the Fed to keep rates near zero longer, prolonging U.S. CD investors' suffering.

I'm not sure how strong that particular link is -- China isn't even America's biggest trading partner currently; Canada is -- but I think Barrington is right that whatever returns CDs achieve over the next few years will be heavily dependent on the condition of the larger economy. That's a little bit of a strange spot for CD investors to be in, as they've spent the last 30 years prior to the economic meltdown fairly insulated from the short-term movements of the economy. Sure, rates would fall when the Fed cut interest rates, but never to the point where the interest on a $10,000 one-year CD would barely cover a dinner for two at Applebee's.

What do you think? How will the performance of the U.S. economy affect CD rates? Do you see a light at the end of the tunnel?

Follow me on Twitter: @ClaesBell.

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