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Loan growth to help CD rates?

By Claes Bell, CFA · Bankrate.com
Monday, July 11, 2011
Posted: 11 am ET

It seems like eons since CD rates were anywhere near normal, and investors have understandably been on the lookout for any sign that higher yields might be on the way.

Fortunately, some signs have been cropping up in the larger U.S. economy that the long CD yield drought maybe coming to an end. First, you have the end of the QE2 monetary easing program by the Fed. While that program may have provided lubrication for the U.S. economic engine, it also artificially pushed down interest rates in the general economy, and its end may prove to be good news for CD investors.

Now we have the Federal Reserve's latest numbers on bank lending showing loan growth in the critical "Commercial and Industrial" category, as well as other key areas. According to the Fed's H.8 release put out on Friday, C&I lending grew by double-digit percentages in each of the last three months, reversing a trend of negative growth dating back to the financial crisis.

Credit cards and other revolving consumer credit lines also showed signs of recovery. After years of negative growth, May actually saw a small gain of 0.2 percent.

The reason that's significant for CD investors is banks use CDs as a way to raise money for their lending operations. If they're not making loans, they don't need CD investors' money as much, and so they aren't willing to pay attractive CD rates to get it.

If loan growth continues to post gains and doesn't succumb to the economic malaise that seems to be evident in so many other economic indicators right now, CD rates could finally be headed up.

What do you think? Do you see higher CD rates coming, or are we in for more of the same?

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