Ben Bernanke

Is the Fed Really Ready to Taper Asset Purchases? CD Rates Could Go Up


by

15 July,2013

There has been a lot of speculation surrounding the Federal Reserve and its policies recently. A couple of weeks ago, Ben Bernanke seemed to indicate that the Federal Reserve is almost ready to begin tapering its asset purchases, thereby reducing economic stimulus.

As a result, long-term interest rates — particularly mortgage rates — spiked. The idea that the era of cheap money could be coming to an end is kind of a bummer for those with debt, and it upset the bond market quite a bit, but it might mean good news for savers.

Could CD Rates Be on the Verge of an Increase?

Since the financial crisis of 2008, the Federal Reserve has been trying to prop up the economy through policy decisions. The first step was cutting interest rates. However, the Fed soon got to the point where it could no longer cut interest rates.

As the Fed cut its benchmark, banks cut their rates as well, leading to lower rates on debt (which is great for consumers) and lower rates on cash products (which is no fun for savers). CD rates dropped.

However, when the Fed couldn’t cut anymore, it had to get creative, since the economy wasn’t sufficiently stimulated — at least in the minds of policymakers. The Fed engaged in what is known as quantitative easing. This is a process that involves “printing money” by purchasing assets, usually from the Treasury. The Fed purchases assets, and that increases money supply. The quantity of money increases, making it cheaper and easier to spend.

The Fed made asset purchases in groups, sporadically, over a period of years. Then, as 2012 drew to a close, the Fed announced that it was upping the ante and making monthly purchases indefinitely. With all of this stimulus, it’s no wonder that CD rates are quite low.

But, with the announcement that the Fed might soon begin tapering off its asset purchases (they won’t stop all at once), a jump in long-term rates was seen. And if the Fed does start tapering off its quantitative easing program, there is a good chance that CD rates — particularly longer-term CD rates — will start to rise as well.

Will It Really Happen, Though?

Of course, after a couple of weeks of excitement, things are a bit muddled again. Speculation that tapering could start as early as September had markets and interest rates in flux. Recently, though, Ben Bernanke seemed to squash those rumors.

He said, during a Q&A about the economy, that the Fed was still dedicated to basing its taper efforts on the results related to unemployment. With unemployment still higher than the Fed would like, it is increasingly rumored that tapering won’t begin until sometime early in 2014.

That means that you probably aren’t going to see big gains for your CD rates anytime soon. However, it might be worth it to switch to buying shorter-term CDs so that you are ready when rates really do start rising again.

Evaluate your individual situation, and figure out what is likely to make the most sense for you. And pay attention to monetary policy. It matters.