Certificate of Deposit interest rates are likely to continue to drop because of a new rate cap that will be going into effect.
Starting in January of 2010, the federal government will begin to index the interest rates that major national banks are paying. BizJournal reported that smaller community banks that may be in danger of a potential bank failure will then prevented from offering interest rates on their certificates of deposit higher than that index.
Although it’s possible that these new regulations will be loosened or waived, consumers should expect that the interest rate cap will stay around for the time being. If you have money in certificates of deposit that are coming due in the next few months, you will want to put that money in new certificates of deposit before the year ends. Consumers should also look at credit unions for higher certificate of deposit rates, as credit unions are exempt from this new proposed rate cap.
As a larger strategy, you should reconsider the money that you place into certificates of deposit. There are other investment opportunities in equities, bonds and treasuries that will provide you with much better interest rates. You will certainly be taking on some risk and you’ll want to leave some money in guaranteed investments for emergency savings, but you are far better off to avoid using certificates of deposits as a significant investment vehicle in your portfolio.
Remember that it’s a good idea to have some amount of your investments in cash or cash equivalents, such as money market accounts, high-yield savings accounts or certificates of deposit, but for most people it should not be the primary driver of their portfolio.
