Hello there,
Traditional federally-insured certificates of deposit are not tied to
the performance of the stock market. That is what often makes them
attractive in bear markets (like the one we are currently
experiencing). You lock in a fixed rate and wait for the CD to mature.
The CD rate you lock in at any given time could be considered
indirectly affected by the ups and downs of the stock market. It
depends on what the Federal Reserve's Open Market Committee, led by
Fed Chairman Alan Greenspan, decides to do with the federal funds rate
(http://www.federalreserve.gov/). When the Fed raises interest rates,
CD rates (after a lag) increase. When the Fed lowers rates, the
reverse happens. The Fed tends to raise rates to stem inflation.
Currently inflation is low and the rates remain low. This is great for
those of us refinancing our home mortgages, but it means CD rates
remain low.
Inflation is generally low when the growth in demand (for products,
services, etc.) does not get ahead of the growth in what the economy
can produce. When demand grows too quickly, we get an upward pressure
on costs and prices. That's inflation.
What does this have to do with the stock market? If the market
plummets, this generally tends to suppress demand. Businesses who've
lost value in the market start to curb their spending. This tends to
keep inflation low and means that interest rates get cut or remain
low. And interest rates on certificates of deposit move accordingly.
Additional Links:
Index-Powered CD: All of the above is regarding traditional
certificates of deposit. There are many CD's that are tied to stock
indices. This is just one example.
http://www.indexpoweredcd.com/
Brokered, "Callable" CD: Watch out for another twist in the CD world
-- callable CD's that a broker can pull back after a year when rates
go low.
http://www.state.va.us/scc/news/brokercd.htm
To CD or Not CD: This is a good explanation of the issues and includes
important information about "laddering" -- a method for protecting
yourself from the shifting of interest rates over time.
http://www.creditcarecenter.com/banking/certificates_of_deposit.htm
Search Strategy:
"CD interest rates" AND "stock market"
I hope this is the answer you were looking for. |
