Dedicated to Deposits: Deals, Data, and Discussion

Will the Fed Cut the Funds Rate to 0%?

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With the latest bad news in the economy and the markets, further rate cuts appear to be likely. JP Morgan economists expect the Fed to make a half-point cut in December and another one in January which would bring the target federal funds rate to 0%. Also, the federal funds futures are showing a high probability of at least a half-point rate cut in December.

As I mentioned this morning, it doesn't look good for savers. At least inflation has gone way down. As a commenter mentioned in my previous post, the interest rate relative to inflation is what's most important. The only thing I fear is that inflation will come roaring back due to all the government spending. That's one reason to be aware of the early withdrawal penalties of your CDs. If inflation and rates do shoot up, you'll be able to withdraw your money without too big of a penalty. For terms over one year, a 3-month interest penalty is the best I've seen. A 6-month penalty seems to be most common, but several banks have much worse penalties. In addition, the penalties can be hard to understand as in the case of Capital One's penalty which includes an Economic Replacement Value factor.


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Comments
19 Comments.
Comment #1 by Anonymous posted on
Anonymous
If the Fed were to eventually cut Funds Rate to 0%, what would be the next move?
Would we then have to pay the banks to take our deposits?

I beleive our economy and financial security is in bigger trouble than our governement is tell us.

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Comment #2 by Anonymous posted on
Anonymous
Sometimes people do pay to have someone hold their deposits. The investment yield on the 3-month treasury bill is currently 0.03%, and I recall reading a couple of months ago that the yield transiently moved into negative territory for a brief time one day.

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Comment #3 by gaelicwench (anonymous) posted on
gaelicwench
Well gee, at least with purchasing an I bomb...er...bond, you've got a temporary rate for all of 6 months.

I think the best thing going for us all now are those reward checking accounts. Play your hand correctly with those and you can indeed save a nice chunk of change, even if they're lowered a whole percent. Use this as an investment vehicle until the financial market rights itself.

Call me Pollyana.....the pragmatist.

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Comment #4 by Postlewaite (anonymous) posted on
Postlewaite
The problem, Gaelicwench, with the Reward Accounts is that their deposit ceiling is just too low for a lot of people.

The average Reward Checking Account ceiling seems to be $25,000.

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Comment #5 by Anonymous posted on
Anonymous
Expect a bank run coming to Citibank very soon. Collapse is imminant.

Wound up putting money in Flushing Savings Bank which is a profitable bank offering 3.80% online checking and local ATM access/debit card. They just nabbed a new CIO, Allen Brewer who was over at AIG and Citibank and Chase/Chemical bank and the like. His AIG ties scare me though his full resume was viewable on the internet and he did a ton of good work with the firm as well. So I dunno how to take the news.

All the banks seem to hire people coming from previous banking experience since there are job cuts and then people start their own firms and move on and the like.

Citibank failure is imminent. I don't care when people say its too large to fail. It will fail.

When Citibank fails however it doesn't look like there will a receiving bank for the funds and it could likely deplete FDIC insurance fund coffers and there will be major economic turmoil that ensues thereafter.

WaMU was huge and failed, funds went to Chase.

Wachovia failed, funds went to Wells Fargo.

Citibank will fail, funds go to ??? The problem is Citibank is so large and there isnt anyone whos larger who can handle the deposits. Smaller players in the game arent able to handle a powerhouse global financial institution like Citibank was with firms like National City, BB+T or US Bank. I can't name a player who could go for Citibank at the moment.

A citibank failure will turn us upside down.

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Comment #6 by Anonymous posted on
Anonymous
I agree with the comments from 6:29PM. I think Citibank is in trouble. For example, the erratic rate changes. The Ultimate Savings Account when from 2.25% to 3.5% to 3.15% to 3%, all within a 4-5 week period. The 6 month CD special when from 4% to 3.5% to 3.1% in a matter of 10 days. The excessive layoffs don't help. There is only one bank that I think could take over Citibank, HSBC. It has quite a global reputation. It would be a difficult acquisition though.

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Comment #7 by Anonymous posted on
Anonymous
I believe there's a sheik out there who is investing in Citibank. Maybe he'll take it over.

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Comment #8 by Anonymous posted on
Anonymous
Maybe someone can help me understand:
What does it mean to have a 0% interest rate?

The Fed funds rate is the rate at which banks lend funds to each other, not the rate at which they Fed lends money to banks (that is called the discount rate).

If a bank is going to get 0% for lending to another bank, what would be their motivation to take the risk of lending? Why are banks going to keep lending if the rate is 0%? How will this boost the economy?

To get the rate down to 0%, the Fed is going to have to inject free money, right? With the Fed giving out free money, what need will banks have for depositors?

Can someone give me the big picture of what is going on?

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Comment #9 by Anonymous posted on
Anonymous
It's all just a sham, just like saying inflation has slowed. Besides gas, what else has gone down in price? Have any of you people grocery shopped lately?

Cutting the Fed fund rate doesn't do squat and they know it. It is just a smoke and mirrors move to make it look like they have a tool to fix things. All it does is punish the responsble people and try to force people back in the markets.

Can't you people see that we are the enemy. Our country needs everyone highly in debt to continue. Debt free with a savings account is unpatriotic. Indebted people are slaves that must work for paltry wages and conform.

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Comment #10 by Anonymous posted on
Anonymous
I have saved all my life and now see my net worth tumble everyday. Why are savers penalized by paying 30% taxes in a cd and rewarded by gambling in the stock market at a 15% rate after one year? As investors, we are minipulated by the people who run the companies, large hedge fund players and people in government, so in the end we never win. I am 62 years of age and was forced out of my job and now can't find employment to make up for the painful loss in the market.

1
Comment #11 by Anonymous posted on
Anonymous
Can someone tell me what their feeling on inflation is with all this govenment spending. Projection as to when it will take hold, how fast and how high?

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Comment #12 by Anonymous posted on
Anonymous
hyperinflation. as soon as china stops buying our bonds and starts selling, we're doomed. there was a nice article in the new york times last week about life in Iceland right now... their currency crashed and now they can't afford anything. as for timing, i've heard people say by the end of Obama's first term we will have hyperinflation. his interview on 60 minutes talking about how deficits don't matter right now kind of confirms that. not his fault though - bush & cheney, with their false bravado about america's might, bankrupted us. warren buffet likes to say that he wants to invest in a business so simple and good that an idiot can run it because at some point one will. well, america had an idiot running it with Bush and now we're done for... everbank has some nice foreign currency cd's and metal accounts if you want to diversify to protect against these risks.

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Comment #13 by Anonymous posted on
Anonymous
CHARLOTTE, N.C. (AP) - Shares of Citigroup Inc. climbed in premarket trading Friday, as the financial giant was said to be looking at selling off pieces of itself.

This makes sense since its too large. I can see pieces of citi merged with the various smaller banks like National City, BB+T, US Bank and the like.

It will be interesting who they sell out the NY market to. I can't name a buyer for the NY Metro area markets or will they leave this part as Citibank.

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Comment #14 by Anonymous posted on
Anonymous
My guess is a bank run on Citibank could be inevitable in few weeks at most.

Its very close right here, but not at the point yet at a bank run today.

If a bank run happens, then a sale of Citibank is impossible leading to deposits being taken over by the FDIC or other receiving banks.

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Comment #15 by Anonymous posted on
Anonymous
"Hopefully, this bubble doesn’t pop. Hopefully it just slowly deflates. Still, I fear there is no escaping major wealth destruction even from these levels as investors everywhere rush to exit all their investments. What do they do with the money? Much of it may be taken from them involuntarily as banks implode and their deposits disappear. In the meantime, they’ll try to get as much cash out as possible amidst a global bank run."

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Comment #16 by Anonymous posted on
Anonymous
Citibank stock at under $4 a share in the $3's now.

When/if we get to the $2's I expect a bank run and CITIBANK will be added to failed bank list of the FDIC.

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Comment #17 by Anonymous posted on
Anonymous
As to when precisely, unclear.

But thats where its headed to right now.

RIP Citibank. RIP Wachovia. RIP WaMU

Growing banks are taking over so there will be new banks formed or expansions of smaller established players.

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Comment #18 by Anonymous posted on
Anonymous
Washington Mutual didn't fail; it was seized. Even the FDIC says that it was solvent.

Wachovia hasn't failed. Perhaps it would have if other banks weren't fighting over it; but that didn't happen.

In neither case has any depositor lost any money. And should Citibank fail, there's no reason to think that any depositor will lose anything, either.

So, stay under the FDIC limits, and enjoy the show.

1
Comment #19 by Anonymous posted on
Anonymous
If the Feds reduce reduce the rates to 0, the management fees on some MMFs will "break the buck" on their investments.
From imoneynet.com the current tax-free 7 day net is .89%
Since the government insures deposits, they would have to pay off investments in low yielding, high fee MMFs.

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