The Fed meets this next week to decide how much they will buy of Treasury notes and other assets to help spur the US economy. The Fed is planning on taking action to help create momentum in the US economy and to promote growth. When people stop buying and selling and start saving, the economy slows and growth is minimal. Manufacturing slows when people stop buying products, which then causes people to become unemployed and the cycle of a recession continues. In a time period when home owners are losing their houses and jobs at record breaking numbers, its imperative for the Fed to act.
The goal: drive up the prices of long-term bonds, which pushes down yields. That, in turn, pulls down rates on mortgages and other loans, spurring consumers to buy homes and cars, and businesses to invest and hire workers as noted by Paul Davidson.
What does this have to do with interest rates? If the Fed buys up Bonds and other assets it will spur banks to start lending more of their cash. Both banks and corporations are sitting on loads of cash which can be used to lend to buyers and to create jobs. If banks are more willing to lend money, people will be able to buy houses, refinance their current one and buy other larger purchases such as car, all promoting growth. Interest rates will drop, mortgage rates will drop, making it easier for people to get into a house with a low payment. If people have more cash to spend, rather than save or put it into a house that’s about to go into foreclosure, then the buying of products and new merchandise can spur the economy into growth and lower unemployment.
It will take a few months to see how this decision will affect CD rates. If banks decide to lend out more money, the low interest they charge will keep CD rates low. A certificate of deposit is a loan to a bank which the bank then turns it around and lends it out to a customer with a small interest rate behind it. Whatever the bank earns, they turn that around and pay out a small portion to the lender. The reason why the Fed’s meeting November 3-4th is so important is because if they do end up buying billions of dollars worth of US Bonds, then the interest rates on everything will fall as well. Mortgage rates will decrease to further record lows, which is great for the borrower, but bad for the saver. Be sure to keep an eye on our CD rates board to see if rates begin to decrease or increase.