December 19, 2008 Update
The Fed cut interests rates to 0-.25% last Wednesday, a drop of between 75 to 100 basis points and while rates on savings and Certificates of Deposit have declined, the declines have been modest- so far.
- Savings Accounts: 8 basis point drop from 3.40% to 3.32% APY
- 1 Year CD: 12 basis point drop from 3.90% to 3.78% APY
- 3 Year CD: 9 basis point drop from 4.06% to 3.97% APY
- 5 Year CD: 11 basis point drop from 4.54% to 4.43% APY
Overall, since early October when rates peaked according to the table below, the Fed Funds rate has come down 175 basis points (1.75 percentage points) while the average savings rate based on the BestCashCow rate table has dropped by just 33 basis points.
We do believe that rates will continue to trend down from here but as others have pointed out, there now exists a spread between deposit rates and the Fed Funds rate. The spread exists for several reasons:
- Consumers demand more return to put their money into a financial system perceived as shaky and somewhat unsound, regardless of FDIC insurance. A recent CNBC survey found that 35% of Americans are still not confident their money is safe if their bank fails. Banks have to pay higher rates to attract and retain this money.
- Banks are competing harder than ever for your money. They have to not only compete against each other, but against other investments, especially treasuries. They need the cash to keep their balance sheets sound and will pay good money for it.
The Fed may have cut rates close to 0% but there are still some great CD and Savings deals above 4%.
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