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Interest Rate Direction for 2007?

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With a stronger-than-expected job report released today (see article), we may see a slowdown in the recent trends of falling CD rates. It seems likely that the Fed funds rate will stay at 5.25% at the next Fed meeting on December 12. If strong job growth continues, this could lead to rising wage inflation and perhaps a return to the rate hikes in 2007.

This article from yesterday quoted an economist who predicted the Fed Funds rate to fall to 4.5% by the fourth quarter of 2007 due to a slowing economy.

From history, it looks as if we are at a peak in the rate cycle, and with long-term CD's continuing to fall (GMAC Bank just dropped their CD rates today), perhaps it's a sign to lock into some high yield long-term CD's. If you do lock into long-term CD's, be sure to check on the early withdrawal penalties. If the economy surprises the banks and continues to grow, we could see high CD rates come back again next year. If the early withdrawal penalty is small enough, it may be worth it to break the CD and jump on the new offer. The average penalties for long-term CD's tend to be 6 months of interest. A 3-month penalty is sometimes available. Watch out for those that penalize you for half the CD term. That can be 30 months of interest on a 5-year CD.
Comments
Anonymous
Anonymous   |     |   Comment #1
Can someone explain the bit about: according to history it is time for rates to fall?
Anonymous
Anonymous   |     |   Comment #2
Historically, when the fed stops raising, the next thing they do is to cut. They don't usually raise, pause, and raise again.
Bozo
Bozo (anonymous)   |     |   Comment #3
It's hard to time the market, whether that be stocks, bonds, CDs, real estate or whatever.

The market's gonna do what the market's gonna do.

With respect to CDs, I just follow the trend, and the trend is not your friend. I locked in as much as I could back in August, for the longest terms I could find. As I said in an earlier post, anything you can get above 5% for longer than a year is probably a good deal. The FED is nuts.

Cutting rates at this point is stupid, because it will kill the dollar and the carry trade, but that is what the market says the FED will do.

So, lock in whatever you can at whatever you can.

Just my $.02

Yours,

Bozo
Banking Guy
Banking Guy (anonymous)   |     |   Comment #4
Here's a chart of the rate trends of the average 1-year CD rate at Bankrate.com. It has dropped a lot since summer.

And here's the history of the intended federal funds rate link. Once it starts falling it has mostly tended to continue this trend for several years.