Feds Cutting Rates: How Does It Affect Your CDs

With all the recent turmoil in Washington over federal bailouts and the general dismal outlook for the financial economy, it may seem like the overall answer regarding how this affects your and your finances is equally as dismal. It is a bit more complicated than this, however. Recently, we’ve all heard about the Federal government cutting national rates; but few of us know exactly who this helps, who this hurts, and who this overall effects the most and how. Below, we take a look at the one of the most popular financial investments, the investment cd, and how it is affected by a Federal Government rate slashing.

First, you may be wondering what exactly it means when you hear speculation about the Feds imminently cutting rates to help ease the financial burden and recharge the economy from its current state. The interest rates that these articles refer to are short term interest rates for borrowing from the Federal Reserve. This includes the risk-free (or minimal risk) investments such as savings accounts and yes, cds.

Why Cds?
So, you may be wondering why cds-a relatively low-action investment type-are among the most affected by a Federal Government interest rate cut. Basically, when the Federal Government offers a better, lower interest rate on investments to a bank, the bank will necessarily opt for their offer over paying you 4%-5% interest for your investment.

Overview of Your CDs
Though you may have a handle on the general applications, functions, and obligations of your cds; an overview may be necessary as these terms do not always seem cut and dry when a financial crisis such as the current one happens. A standard cd works like a savings account, in that your principal amount invested is always safe. You research current cd rates-or allow your financial broker/planner to shop around-and invest your principal in a particular cd with a particular set of rules: maturity dates, non-callable or callable, and sit on the investment waiting for it to mature and give you the accrued interest plus principal agreed upon.

Variable of the Effect on Your Investments
Now just because you have a cd, doesn’t mean you will be immediately affected. It all goes back to the terms you agreed to upon getting the cd, and where you are in the process of acquiring cds, maintaining/renewing cds, and sitting on your cds. If you have a c d with a variable interest rate, then your cd will be affected by the slashing of interest rates and you will no longer have a high yield cd. If-on the contrary-you signed up for a fixed rate investment cd, then for the remaining length of your cd agreement you will still accrue the same amount of interest. If your cd is coming up for renewal, you won’t have a great list of cd interest rates options. Lastly, if you were considering investing in a cd and haven’t yet; you may want to wait, as current cd rates will not yield hardly any interest for awhile.

Now What?
So you have the less than rosy news, now what? Just because the economy is going through a tough time and is not ideal for short term investors at this point, it doesn’t mean that the economy will never rebound and you have to pull all of your investments out. On the contrary, the economy works in ebb and flow and will return to a more profitable time-as it always does. The best thing to do is wait it out, don’t make too many sudden high risk movements with your investments, and practice safe investing whenever possible until this period of financial crisis passes.