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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.


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