Finding a decent rate on a certificate of deposit account these days isn’t an easy thing to do. CD rates have been coming down so fast recently the average 12 month CD rate is nearing just 2.00%. A far cry from over a year ago when one could find promotional 12 month CD rates around 5.00%.

Many of Monitor Bank Rates readers are asking the question “why are rates so low and when will rates start going up again?” 

Rates are so low these days because the economy is in a recession, as a result the Federal Reserve Bank has lowered the Federal Funds Rate ( the interest rate which banks lend their funds deposited at the Federal Reserve to other banks usually overnight) to historic lows. The current Fed Funds rate is targeted between 0% and .25%.

Also contributing to low deposit rates on certificate of deposits and savings accounts is the Troubled Asset Relief Program (TARP). Banks are funding their reserves by participating in TARP so they have less of a need to lure depositors with those special promotional CD rates we saw as recently as the 4th quarter of last yet. Granted there are still promotional CD accounts available with rates higher then the average but the rates are no where near the rates we saw last year.

To answer the second question “when will CD rates start going up again” that will depend on when the economy turns around. Rates will eventually start going up again and they might go up faster then they have come down. The reasons being there is so much money being pumped into the economy now in various forms including.

• Record low interest rates
• The stimulus package that will be signed by President Obama today
• The Federal Reserve printing money to purchasing asset backed debt to stimulate the credit markets
• The U.S. Treasury and the Feds creating a bad bank to encourage investors to buy toxic mortgage assets from banks

Last but not least all this pent up demand for housing and consumer goods will fuel inflation when people start feeling more comfortable or able to make purchases again. 

The Feds at some point will feel the economy is on strong footing and will start raising interest rates to limit the risk of inflation. As a result, deposit account rates, including CD rates will start going up.