No. of Recommendations: 1
OK, Back to the CD topic.

Liquidity is tight and there is upward pressure on the Fed Funds benchmark 5.25%. Banks are not willing to lend at this rate because this rate does not price in some of the anticipated risk with the subprime market. Banks can now also go to the discount window ~5.75%. The decrease in discount window should help out the smaller banks as the larger appear to be hording the Fed injected liquidity. This is not going to change in the short term until the subprime BS goes under the bridge. And dropping the Fed Funds rate will not make this problem go under the bridge!

In this market, with the exception of some banks with "high growth" plans, the funding source is not going to be CD's thus no reason for rates to go up - holding rates fairly constant. The banks want to keep the liability side short term because if this does blow up they want to reprice faster as rates drop. But - will the subprime really blow up?

GDP will take a hit from the housing market but the financial sector side of things have no reason to lower costs as wider credit spreads will step in and allow a stable net interest margin. Will the Fed drop the rates in response to lower GDP? In this case, I don't think so at least until it can be clearly shown the markets are back on the level.

So, bottom line from the peanut gallery - There will be an occasional CD sale with some rates ~5.5%-5.7% through the end of the year. I would not hold out for more over that horizon. In about six months, after the subprime is on the even keel, the Fed may have to drop rates if GDP drops too much, but my crystal ball/tarot card says inflationary pressures in check - rates about the same over the next year (+/-25 bp)with a nod to the minus.

d(FedFunds)/dT = 0
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