BestCashCow Blog

Fed Drops Rates to 1% But Banks Not Responding

The Fed last week dropped rates by 50 basis points to 1%, the lowest level since 2003.  Banks though, are not following the Fed's move in lockstep.  While banks have lowered some of their rates, bank rates have not fallen as fast or as far as either the Fed Funds Rate or treasuries.  The chart below, taken from the BestCashCow article, Savings Rates Holding Up During Banking Crisis tells the story.

Today, despite the Fed rate cut, the top savings rate still stands at 4% APY, the same top rate before the rate cut.  The top five year CD is well above 5% APY and the top 3 month cd is above 3.5% APY.

This is an indication of the new power that depositors have since the collapse of the real estate financial model.  Savings is coming back en vogue and banks need access to those funds in order to survive, and grow.  The game has changed.

Savings Rates and CD Rates Fall Sharply

The Federal Reserve made an "emergency" 75 bps cut in the Fed Funds rate on January 22, then followed it with a 50 bps cut at its scheduled meeting on January 30 - its largest decline of the Fed Funds rate in 8 days in more than 20 years and leading to a Fed Funds rate of 3.00%. As a result, Treasury rates and all short term products have had dramatically declining yields.  Savings rates are falling dramatically and CD rates are being withdrawn constantly.  Against the backdrop of significant inflation and a diminution in the real value of the dollar, Americans are increasingly pressed to try to figure out where to stash cash that preserves its value.  No - this is not an endorsement of Ron Paul - it is just the facts.

Short term Treasuries Yields Drop Dramatically As Investors Rush to Safety

Short term treasuries yields has their single biggest 1-day move in 19 years on August 20 with 3 month Treasuries falling under 3%.  The yield curve has now steepened dramatically.  While savings accounts and short term CDs are still offered well above 5%, cash and cash equivalent securities may soon become less attractive.

Fed Leaves Interest rates Unchanged

The Federal Reserve has left interest rates unchanged and indicated that inflation may be moderating.  While inflation risk is no longer described as elevated, the Fed's statement indicated that there is some risk that inflation may not moderate as expected.

Bond Yields Shoot Higher.

On June 7 bond yields on the intermediate and long ends of the curve spiked higher on news that Bill Gross of PIMCO is no longer bullish on bonds. While equity markets are reacting negatively to the news (higher yields may jeopardize M&A activity), the US yield curve has become uninverted for the first time in 9 months (which many argue is good since an inverted yield curve usually indicates that a weak economy lies ahead).

Fed Minutes From May Leave Market Observers Guessing.

The Fed minutes, which came out May 30, left some market observers believing that the Fed would need to raise rates to move against inflation before the end of the year, while others believe that the Fed's next move will be to lower rates to guard against a housing collapse and stimulate a slowing economy.

Fed Leaves Interest Rates Unchanged.

For those who really get excited by monetary policy, this is like watching paint dry.

Time to Take another Look at Cash?

With an increasingly volatile situation in Iran and a Federal Reserve about to articulate a new policy that pundits seem completely unable to guage, it seems that the recent market strength might not extend. With sort-term cash rates becoming interesting, maybe it is time to take a breather and go to cash?

Rates Continue to Fall.

Treasury rates over one year began November by continuing their fall on fears that declining US GDP will lead the Federal Reserve to begin to cut rates. The yield curve is grossly inverted and longer term instruments are less attractive than they were several months ago. Cash equivalent rates and short term instruments (less than 1 year) remain firm.

Fund Funds Rate at 5%

The Federal Reserve has hiked the Fed Funds rate to 5% on May 10, 2006. The Fed's decision, which was unanimous, stated that economic growth has been quite strong so far this year and will likely moderate to a more reasonable pace as a result of the run-up in energy prices and a slower housing market. There continues to be a risk of inflationary pressures in the near future due to higher commodity prices and strong resource utilization. Therefore, some further policy firming "may yet" be needed in order to tame inflation risk. The entent and timing of such moves will depend of incoming economic data. Pundits now have a lot to work with.