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End of QE2 to raise CD rates?

By Sheyna Steiner · Bankrate.com
Wednesday, April 27, 2011
Posted: 3 pm ET

After today's Federal Open Market Committee meeting, Fed chairman Ben Bernanke reaffirmed the Fed's commitment to continuing the quantitative easing program, scheduled to purchase $600 billion worth of long-term Treasury securities through the end of June.

The question will be what happens when the Fed stops buying Treasuries?

The quantitative easing program was designed to put downward pressure on interest rates. When the program ends, it would seem to suggest that rates would increase. Though rising long-term interest rates could prove problematic for the economic recovery, savers would benefit from a boost in long-term interest rates as they would also pick up long-term CD rates.

I interviewed Bankrate's senior financial analyst for today's feature story, "Fed keeps rates low so recovery won't slow."

"Conventional wisdom would suggest that long-term rates would go up," he says.

However, when the first round of quantitative easing came to an end in 2010, the economy actually hit a stumbling block.

"Long-term rates actually declined even though the Fed had stopped buying. We could see something similar this time. The stock market and other risky assets have had a huge run on the back of QE2 and when it comes to an end we could see a correction in the market that would end up driving long-term rates down even though the Fed would be out of the market at that point," McBride says.

Jeremy Siegel, the Russell E. Palmer professor of finance at the Wharton School of Business at the University of Pennsylvania, believes the market has already taken the end of the easing program into account.

"I think its totally discounted by the market I don’t think there is going to be any great effect. I don't think it will have a negative effect and is already discounted in prices," he says.

No news would be good news. Savers will likely not get a lift but a continued economic recovery means that short-term rates will eventually go up and with them, CD rates.

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