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CD rates likely to fall soon

The Baltimore Sun

If you've been waiting to find the right moment to lock in your money in a certificate of deposit, it's time to get off the fence.

Federal Reserve policymakers meet today and the smart money says they will cut a key interest rate by a quarter-point. For more than a year the federal funds rate - what banks charge each other for overnight loans - has held steady at 5.25 percent.

Fed has resisted

Wall Street has been clamoring for a rate cut all summer as losses in the subprime mortgage market mounted. Up until now, the Fed has resisted.

Policymakers are likely to cut rates now because of the recent employment report that showed a loss of 4,000 jobs in August, says Greg McBride, senior financial analyst with Bankrate.com.

CD rates aren't tied to Fed maneuvers, but they tend to dip anyway before a Fed cut, McBride says.

"That has yet to happen this time around," he says. "Banks are reluctant to slam the door on their consumer deposits that are a particularly vital source of funds with markets gripped by liquidity issues."

Likely to drop

But if the Fed acts as expected, then CD rates likely will drop quickly. That means consumers have a brief opportunity to lock in current rates.

"The window is open. I'm not sure it's going to stay open very long," McBride says.

"I'm surprised it hasn't shut already. There is no benefit to waiting. If you're looking for an opportunity to lock in, I would do it today, not tomorrow."

Consumers should shop around for the best rates. Bankrate's Web site at www.bankrate.com is a good place to start. It lists the highest rates available nationwide, or if you prefer, in your own backyard.

Last week, Countrywide Bank offered the highest annual percentage yield on a one-year CD at 5.65 percent. You must deposit at least $10,000 to get that rate.

'At least 5%'

Pierre P. Habis, managing director of Countrywide Bank, says consumers should check how much they are earning on their savings and CDs.

"If they aren't earning at least 5 percent, their money isn't working hard for them," he says.

The savings bank is affiliated with Countrywide Financial Corp., whose problems in the mortgage market have led some to speculate the company might file for bankruptcy court protection.

'Bank is healthy'

But Bert Ely, a banking consultant in Virginia, says consumers don't have to worry about Countrywide Bank.

"The bank is healthy," he says. "There is no reason for people to be worried about their money. What people should do in a situation like this, if there is any concern but they want the higher rate, is just keep the balance under $100,000." That's the amount of protection from federal deposit insurance for an individual account.

Or you can try one of the other lenders that also offer CDs at rates above 5 percent. Some of those, too, have lower minimum deposits than Countrywide.

Where rates are headed in months ahead is anyone's guess. Habis says Countrywide will base its CD rates on what its competitors do.

Fed is buying time

McBride says the expected quarter-point rate reduction will buy some time for Fed policymakers to assess where the economy is headed before their next meeting at the end of October.

In the meantime, consumers need to assess what they're earning on their savings.

Questions? Comments. Write personal.finance@baltsun.com.

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