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Interest rates on CD’s and money markets likely to remain low

Posted by Jamie Downey  May 26, 2011 09:10 AM

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I have been saying for two years that interest rates are likely to go up. At some point, I have to be right, because they can not go any lower. The federal reserve's “quantitative easing” program is scheduled to end next month and I was thinking that interest rates will start to rise shortly thereafter.

Rising interest rates will certainly be welcome news for those that rely on interest as a significant source of income. I know many seniors are being hurt financially as they have almost no ability to earn a reasonable amount of interest. And it does not end with individuals, banks and insurance companies are also reliant on interest as a major source of income and have little place to turn with excess funding.

However, I am not sure that my prediction of rising rates will come to fruition any time soon. Short term interest rates on money markets and short term CD’s are tied closely to yields on the federal funds rate as set by the Federal Open Market Committee of the Federal Reserve. Here is what the Federal Open Market Committee stated at the end of April 2011: “The Committee will maintain the target range for the federal funds rate at 0.0 percent to 0.25 percent and continues to anticipate that economic conditions … are likely to warrant exceptionally low levels for the federal funds rate for an extended period.”

How long that “extended period” is, I do not know. My unscientific search seems to indicate that these low interest rates will be here for at least another year. Bank of America’s US Economic Weekly bulletin predicts that federal funds rate will only increase to 0.50 percent - 0.75 percent through 2012 from its current 0.0 percent - 0.25 percent. This increase would still leave rates anemically low.

So you may want to brace yourself for a continued low rate environment. There are currently not a lot of options out there for those averse to risk.

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