Time To Lock In CDs After Fed Lowered Interest Rate Again

So the Federal Reserve continued its aggressive rate reduction campaign on Tuesday with another 75 basis points cut which brought its benchmark short-term interest rate to close to zero. At 0.25%, the interest rate is the lowest in decades.

After the latest rate cut, lenders followed suit by lowering their prime rates that they charge customers for their loans and credit card debts. Pretty soon, online banks, where we put most of money, will adjust the interest rates they offer to customers when borrowing money from them. In fact, some banks, such as ING Direct, have already lowered their rates. And from now on, we will likely be sitting in a low interest rate environment for quite sometime because so far all the efforts from the government don’t seem to produce any significant results in reviving the sagging economy. From what I read, the rate could go even lower, at 0%, if things don’t improve in the coming months.

So at the time when interest rates from online banks keep dropping, where should we put our cash? Make no mistake, online savings accounts are still a valid option for anyone who wants a decent return for their money, which you probably won’t get from the stock market now and not from Treasury bills/notes either. As long as the bank is FDIC insured and the amount of deposits is below the insurance limit (the current insurance limit of $250,000 is gill till the end of 2009), there isn’t too much to worry about. The problem for online savings accounts is the adjustable rates, which means you are not guaranteed for the rate you are getting now.

If you want guaranteed return, the time is now to lock in certificate of deposit (CD) with good rates before they disappear. However, even when selecting a CD product, I will focus my attention on those with relatively short terms, such as 1 year to 18 months. 3- or 5-year CDs won’t be an option. The reason is simple: I don’t expect interest rate to stay low for that long. If CDs are on your mind now, you may want to check out these offers:

• GMAC Bank: 12-month, 4.10% APY, $500 minimum;
• FNBO Direct (a FNBO Direct Savings Account is required): 12-month, 4.00% APY, $500 minimum;
• E-Loan Bank: 12-month, 3.80% APY, $10,000 minimum;
• ING Direct: 12-month, 3.50% APY, $500 minimum;
• HSBC Direct: 12-month, 3.50% APY, $500 minimum;
• Umbrella Bank: 12-month, 3.45% APY, $1,000 minimum;
• IGoCD: 12-month, 2.95% APY, $1,000 minimum;

The benefit of CDs is that you get a guaranteed rate for a certain period of time, which is good when the trend of interest rates is lower like now. The downside, of course, is you could stuck with a low rate if the interest rate starts to move up again. Therefore, you need to select a term that fits your financial circumstance.

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