Fed meeting 8/12/09
The Federal Reserve (FOMC) meet this week and continues to hold rates at the same low levels. The commentary, and opinions of many others, is suggesting that we may be at the bottom of this recession, however it will probably be a long, slow recovery. I suspect that consumer confidence will be constrained for a long time. Just like our grandparents carried the Great Depression memories with them, so will those of us effected by this past year. The high unemployment rate will also take a long time to recover. I'm guessing that interest rates will stay this low for at least a year.
So, what to do if CD rates are going to be at these levels for maybe a year? Break up your CD investments into pieces and spread out the maturities to improve your earning. If your convinced that rates will go up a year from now, try this . . . build a two step CD Ladder.
Split your money in half and buy a 6 month CD with half, and a 1 year CD with the other half. The best rate tables on-line say the best rate for a 6 month CD is 1.76% and for a 1 year CD is 2.05%. The blended yield on these two is approximatel 1.90%. If your wrong and rates go up in 6 months you will have a CD maturing and can move your money. Say they go to 2.25% for a 1 year CD. Role over the 6 month CD when it matures into the 1 year. Your new yield becomes 2.15%. Plus you still have a CD coming due in 6 months and another in a year. CD Laddering can work for your with little or no risk (see CD Advantages and CD Disadvantages).
When Rates Are Up
When the interest rate trend is upward it is best to switch to having the interest on your CD portfolio reinvested in new CD's instead of being compounded into the existing CD's. This allows you to take advantage of higher rates each time interest is paid on your existing CD investments. A portion of you portfolio in a laddered CD structure is also always coming up for renewal. This allows you to take advantage of the higher rates without having to get out of a single CD investment whose maturity is well into the future.
When Rates Are Down
Laddered CD's do extremely well when interest rates are going down. This is also a time when the economy may not be doing to well. If you have a 5 year ladder set up in this environment only 1/5th of your investment will be re-pricing at the current lower rates and 4/5th will stay at the higher earlier rates. Thus you end up dulling the effect of falling CD interest rates. Also, if you continue the ladder strategy you will be looking to replace that maturing CD with a long term CD which should offer a higher rate of return then a short term investment.