In somewhat of a surprise move, the Federal Reserve cut rates by 50 basis points today. In addition, the central banks of Europe, Canada, the UK, Switzerland, and Sweden also lowered their rates. The global scope of this rate reduction is unprecedented.
While the timing was a bit unexpected, we've been foecasting a rate cut for some time. Yesterday, markets pegged the probability of a rate cut in October at greater than 80% with a drop to 1.25% being the most likely scenario. But that's not the end of it. Markets believe there is a 70% change that the Fed will drop rates to 1% by December. It appears that the markets expect further cuts.
These numbers reflect growing awareness that the financial system is in severe crisis and that the recently passed bailout package will not be enough to right the ship. The Fed is loading all of its weapons to try and reinflate the economy and get banks lending again.
Rates on savings accounts cds, and money markets will drop. In fact, we've already seen falling rates on some products. If you plan on opening a CD, you might want to consider locking in now. If the Fed Funds Rate drops, the rates on savings accounts and certificates of deposit will also drop.
For my ongoing commentary on interest rates and where they are going, please visit my Fed Funds Rate Discussion.
Comments
Slee_Stack
October 10, 2008
Fed drops rat 0.5% and my Online Savings dumps a full ONE percent. Looks like Chase (former WAMU account) is taking this opportunity to stick us. Nice. Time to look for a new bank.
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Sam Cass
October 11, 2008
Chase actually lowered the WaMu rate before the rate cut. Chase, like BofA and Wells doesn't believe in high rates. They try to attract your money by putting a branch on every street corner.
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