Interest Rates Dropping Again?

[Megan]

Today, Ben Bernanke "signaled a readiness to keep on lowering a key interest rate to shore things up." Today's announcement caused stocks to drop in response as well.

I'm not sure what I think at this point. From a personal standpoint, it just means that the interest rates on my savings accounts will drop yet again, and I'm considering dumping some funds into a cd with a decent rate while I still can.

What do you think? Reactions? Plans?

[MSMomsmoney]

Looking for some decent CD rates right now.

[Xin Lu]

I really think the Fed should hold off the interest rate cuts and see what the last few big cuts did to the economy first. Just keep on cutting it doesn't really help that much since they will get to 0% in 4 more month if they cut .75% every time.

[rolltimer]

Interest rates are too low as it is for those of us trying to save and earn something off a safe liquid investment like a money market account. Lowering interest rates does nothing to address the rising prices of gas, food, utility costs, and everything else that impacts the ability of consumers to spend. Check your credit card interest rates. Have those rates dropped? I don't think so. Compare the spreads between the credit rates you pay on cards, loans and other credit accounts with the interest rates you receive on CDs, money market funds and savings accounts. Horrendous.

[rstlne]

Originally Posted by rolltimer

Check your credit card interest rates. Have those rates dropped? I don't think so.

In fact, the opposite is happening:
http://www.abcnews.go.com/GMA/story?id=4277250&page=1

Some banks are hiking credit card interest rates as a quick way to raise some cash to alleviate their own liquidity problems.

I would suggest the following:

1. If you've set aside cash for an emergency fund then quick access to the money is more important than earning a good interest rate. So there's no need to worry too much about falling interest rates there.

2. If you've set aside cash for long-term savings, online savings accounts and CDs are poor ways to protect your purchasing power. Since the Federal Reserve's attempts at improving market liquidity are likely to be inflationary, I would take a look at hard assets.

[lilac]

Originally Posted by rstlne

2. If you've set aside cash for long-term savings, online savings accounts and CDs are poor ways to protect your purchasing power. Since the Federal Reserve's attempts at improving market liquidity are likely to be inflationary, I would take a look at hard assets.

Forgive my ignorance, but what exacly are hard assets? Are those things like gold or are they not as literal as that? I'm just asking the stupid question, because, like they said in school, if you're confused or unclear about something, there are most likely many others around you that are too

[rstlne]

Originally Posted by lilac

Forgive my ignorance, but what exacly are hard assets? Are those things like gold or are they not as literal as that? I'm just asking the stupid question, because, like they said in school, if you're confused or unclear about something, there are most likely many others around you that are too

I did a web search and saw a few different (and inconsistent) definitions for "hard assets", so I should've been more specific. I meant non-financial assets: precious metals (gold, silver), natural resources (oil, coal, uranium, timber, copper, etc), real estate. (although I can't recommend real estate investments until around 2011 because we still have a few years of ARM resets to go) This article from SmartMoney, although somewhat out of date, explains portfolio diversification with hard assets.

[CheapCanuck]

I can't see them cutting interest rates too much further. Inflation will become a very real concern if they go too much lower. Even worse is the potential of stagflation, where economic growth continues to slow at the same time as inflation rises. They are walking a very shaky tightrope at the moment...

[MSMomsmoney]

1. If you've set aside cash for an emergency fund then quick access to the money is more important than earning a good interest rate. So there's no need to worry too much about falling interest rates there.


I tend to disagree with you there.

While I have a smaller (under $2K) amount of emergency fund available in a liquid online savings account (WAMU)---I WANT to have CD's for the rest. I am working on fully funding my emergency funds.

If a TRUE emergency were to occur, and I needed the money, I would cash out the CDs.

OTOH, having the money in a higher earning CD is good for me, and it prevents me from spending it on a "fake" emergency.

I simply make CD ladders. I was fortunate to get in on the PenFed 6% 3 year CD a few months ago.


Now Im looking for some new ones, before they tank even more.

[Anne]

Originally Posted by MSMomsmoney

OTOH, having the money in a higher earning CD is good for me, and it prevents me from spending it on a "fake" emergency.

I think this is an excellent point. There's value in there being a little bit of pain or difficulty involved in cashing out true emergency funds. I've heard of people stowing emergency cash in online-only accounts for the same reason--it takes a little time to get to them, but not so much that you can't access the cash when you really need it.

However, maybe what rstlne is pointing out is that deposit accounts don't pay well even in the best case. Whether a CD pays 2% or 5%, either way, it's not doing much for you--just keeping ahead of inflation, if that. I think a good idea is to keep only as much cash as necessary for a true emergency and for near-term expenditures (e.g., vacations, car repair), and invest the rest in another vehicle.