Picking up Nickels

Wednesday, October 08, 2008

Fed emergency rate cut: lock in CD rates now!

The FOMC slashed the target funds rate today by 50 basis points to 1.5%, a level we haven't seen since September 2004. The impact that this latest cut will have on savings yields will not be good.

According to Federal Reserve data, the average rate for a 6 month CD was 1.74% in 2004 as the target funds rate was inflated 100 basis points from 1.25% to 2.25%. In contrast, the September 2008 average 6 month CD rate was 3.82% with a 2% target rate.

Basically, the seizing up of the credit markets has added a premium to CD rates offered by banks and credit unions as they try to get the capital that they need. I believe that this premium could disappear quickly if the government "rescue plan" works as intended. It certainly didn't take Washington Mutual long to drop rates once JPMorgan Chase came to the rescue.

So if you're looking for a safe place to stash some idle cash, now is the time to act. There are still some pretty good deals out there, but I would act quickly because they could disappear at any time. My current favorites are the Penfed 5% APY CDs for terms of 3,4,5, and 7 years and the E-Loan CD deals for terms of 1 year or more, topping out at 5.25% APY for terms of 5 and 6 years.

And as always, please be sure that your deposits on account are below FDIC and NCUA insurance coverage levels.


2 Comments:

  • Frugal Frugalson....do you have the numbers yet to calculate the November I bonds rate? I have kept buying I bonds despite the 0 fixed rate. just wondering whether to hold off on my October purchase until november!
    Thanks!
    Bill

    By Anonymous Bill, at 10/11/08, 2:21 PM  

  • The September 2008 CPI-U number comes out on Thursday October 16th, which is the final piece needed to calculate the inflation component for November 2008 issue I-Bonds.

    By Blogger Frugal Frugalson, at 10/11/08, 9:19 PM  

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