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Fed Cuts Rates by 50 Basis Points - End of the 5%+ Savings Accounts?


The Fed just cut the target federal funds rate from 5.25% to 4.75%. It was a larger cut than many had expected, and it shows the concerns of the Fed over the mortgage meltdown. From the FOMC's statement:
Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.

So how quickly will the banks respond? And will the rate cuts be half a percent? During the two years of rate hikes in 2005 and 2006, it often took many online banks weeks before they responded with a rate hike. But with rates falling, they may be quicker to respond. We can hope that the online banking competition will prevent too much of a drop.

Early in the 2004-2006 tightening phase, the online banks like ING Direct and Emigrant Direct kept their rates above the target fed funds rate. But that changed when the rate approached 5% and above. Emigrant Direct's peak rate was only 5.15% APY, and that didn't last long. It went back down to where it currently is now at 5.05%. The yield of around 5% seems like it was a common yield for many online banks. A few online banks made it to 5.25% APY or a little above in the last year. Most banks that set rates higher than that were either doing it as promotions (like at HSBC and FNBO Direct) or due to the recent mortgage problems (like at Countrywide and IndyMac). So with the new fed funds rate at 4.75%, I have a feeling a 5% savings account will soon be a tough find.

The next two FMOC meetings will be on October 31st and December 11th. According to CNN article, many are expecting the Fed to cut rates at least one more time this year.

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Anonymous   |     |   Comment #1
Opened another Green Day account (Umbrella) just prior to coming here; a POD account this time. What the heck, a hundred bucks is cheap insurance, at least for 90 days. And of course you end up getting the hundred back. I'm afraid Halloween could be really spooky for savers this year!
Bozo   |     |   Comment #2
I locked in a number of long-term CDs a year ago at an average of 5.75%. Just had a feeling this was going to happen.

I know the stock market loves this, but I fear the dollar will tank big-time with these lower interest rates.

Oh, well, I guess this is why one stays diversified. My equities were "en fuego" today.



PS: As I always said, anything over 5% is a gift.
Anonymous   |     |   Comment #3
I too have been putting money into two year CD's over the last few months, but most of my CD's are in shorter terms, so now as they mature over the next few months, I'll have less options - at least with insured bank accounts.
mk   |     |   Comment #4
Since you spoke of staying diversified, I recently invested in some Corporate backed Trust Certificates. Consider tickers XFJ, XFL, CWZ and JBI. Their historical prices show a lot of stability and effective interest rates are around/over 8%. Not just these, there are several others to review and choose from.

Unlike CDs, these are liquid and if you have a discount brokerage account, they would cost anywhere from $0 to $10 per buy/sell transaction.

Note - Interest is not treated as qualified dividend.
Bozo   |     |   Comment #5
To "mk":

Thanks for the heads-up; I'll take a look at them.

Asset-based funds may have tanked for now, so your suggestions may be on the radar.



Anonymous   |     |   Comment #6
Figures...My big CD matures in about 45 days... :o(
Bozo   |     |   Comment #7
To "mk":

Hmmm, still checking those trust certificates.
At first blush, they seem to be a tad illiquid.

Stated another way, roach motels.

My wife was in a roach motel with a whole lot more assets (XPRTX) and I coerced her to get out while the getting was good, back in April, when the NAV was 9.08.

Needless to say, it's a whole bunch lower now.

Stated another way, thanks, but no thanks.


Anonymous   |     |   Comment #8
Is it my imagination, or did ING Direct already lower their rates from 4.5% to 4,3%?
Anonymous   |     |   Comment #9
You are correct, ING has lowered all their rates since yesterday. No CDs left at or above 5%. That sure was quick!
Anonymous   |     |   Comment #10
I just got an email on the 14th from ING offering their 5.25% added value CDs. Four days later they jack their rates?

I guess thats why they said this at the bottom in fine print

ING DIRECT retains the right to withdraw this offer at any time.
mk   |     |   Comment #11
Bozo, these are not mutual funds. They trade like securities. Ok, the daily volume isn't large, but they are still liquid unlike CDs which you cannot get out of if you need cash.

With interest rates going down, such securities will surely become of interest.

Anyway, who cares!!
Ashish   |     |   Comment #12
Countrywide still offering the best rate for another 1 year in CD - 5.65% APY (min. 10K) Get that before it is taken away :)

Link below-
Anonymous   |     |   Comment #13
I'm a little leary of Countrywide. I don't like their recent troubles or the fact that bankrate.com has a U rating on them.

All that said, their rate looks real good--almost too good to resist.