Wow! Why Are CD Rates So Low?

The Wall Street Journal reported on August 12, 2009 that the national average yield on six month Certificates of Deposits (CD’s) was ¾ of 1% and the yield on two year CD’s was 1.48%.

Here are a few of the reasons I have uncovered for these dismal rates of return:

•    With the banking crisis of 2008, the insurance rates that banks pay to the FDIC have skyrocketed (up to ten fold).
•    Banks are tightening credit on business loans as they can little afford more write-offs.  Banking profits are declining as less profitable loans are being made.
•    Banks are flat out attempting to increase the amount of money they make on the spread between money they loan out (revenue) and the money they borrow in the form of savings accounts and CD’s (expense).
•    Banks are under increasing regulatory pressure which increases their cost to comply.
•    Investors were shocked with the stock market in 2008, and want guarantees on their money.  Banks have been able to attract the money they need for loans even at these low rates. 

I always recommend that investors have an adequate amount of emergency funds tucked away at their local bank.  However; you should review how much money you have sitting in accounts earning little or nothing.  Currently there are well diversified safe bond funds earning three to five times more.