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Good news won’t budge Fed, CD rates

By Claes Bell, CFA ·
Monday, February 6, 2012
Posted: 2 pm ET

The drop in the national unemployment rate from 8.5 percent in December to 8.3 percent in January made big news nationwide, and seemed to a lot of folks to signify a solidified economic recovery. But if CD investors are hoping the stronger-than-expected employment report will cause the Fed to accelerate its timetable for a rate increase, they may be in for a disappointment.

From Jon Hilsenrath at the Wall Street Journal:

Nomura Securities economist Lew Alexander said the Fed's long-run economic forecast is likely to be the key. The central bank sees inflation dropping below its 2 percent objective in the months ahead. It sees unemployment falling very slowly over the next three years, to between 8.2 percent and 8.5 percent by the end of this year, between 7.4 percent and 8.1 percent at the end of 2013, and between 6.7 percent and 7.6 percent by 2014.

As long as Fed officials expect inflation to come in below 2 percent, and unless unemployment moves convincingly to a faster rate of decline, Mr. Alexander thinks they will stick to their plan to keep interest rates low and could well do even more. A stronger-than-expected recovery would change that, "but I think it is way too early to draw that conclusion," he said.

In case you missed it, the Federal Reserve rolled out its first ever projection of the federal funds rate last month, which showed most of the FOMC members believe a hike should be delayed until 2014 at the earliest.

A hike in the federal funds rate would be a welcome sight for CD investors, because CD rates are closely linked to that key rate, but I agree with Alexander that it's not likely as long as inflation is under 2, or even 3, percent. That's especially true during a presidential election year, when I'd expect the Fed to try to keep as low a profile as possible and avoid any controversy.

What do you think? Will rising inflation or an accelerating recovery force Bernanke's hand? Or are CD rates doomed to stay in the basement until 2014?

Follow me on Twitter: @ClaesBell

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March 18, 2012 at 12:48 pm

Econ major, actually. Revolving cidert is like a cidert card debt. All banks in a country have cidert cards with all other banks (except they normally don't charge each other an arm and a leg that's reserved for the customers ), and the shortest short term interest rate possible is the interest rate on banks' cidert cards with other banks.Measuring banking profit is a bit convoluted banking panics happen because it gets too convoluted for the banks themselves.

Claes Bell
February 08, 2012 at 2:13 pm

Agreed. I would be really skeptical of the deal for a couple of reasons. One, the rate is, as you pointed out, well above-market. Second, regardless of whether the CD is brokered or not, they should be able to tell you the issuing bank. At the very least, this is essential for making certain you don't already have deposits with that bank that would push you over the FDIC limit of $250k, but in this case, along with the above market rate, makes me suspicious. As a rule of thumb, most reputable brokers are happy to provide information/disclosure to the nth degree.

February 08, 2012 at 2:05 pm

BEWARE THE RATE! Sounds very, very shady. I've been searching daily for a good rate and they do not exist now. Nobody, but nobody will issue a 4% rate now!!!!!!!

February 06, 2012 at 6:25 pm

Hi all, and pardon my ignorance. A company called First Financial Group posted an ad in the local paper stating they could offer a FDIC insured 6 month CD at a 4.47% APY. I called and talked to a "representative" of First Financial regarding this CD. I was told that he could not disclose the name of the institution or any other details regarding the issuer. I asked if I came in could he provide me with a list of FDIC insured institutions that could pay these above market rates. He said that the institutions that offer these "brokered" CD's change daily and that they are a promotional rate, and thus he could not send me home with a list of banks, S&L's, etc. Has anybody had any experiences with these brokered, promotional CD's? Are there really banks out there that will pay these kind of rates?