After remaining steady for the past three weeks, average savings rates and cd rates dropped over the past week. Perhaps more significantly, the top savings rate tumbled.

Savings Rates

Average rates dropped from 1.36% APY to 1.34% APY. The drop unfortunately was led by rate leaders. Southern Community Bank dropped the leading non-promotional rate from 2% APY to 1.75% APY. Franklin Synergy also dropped their rate from 1.65% APY to 1.6% APY. For promotional rates, Everbank remains on top with their 3-month introductory bonus rate of 2.25% APY. After the three-month period, the rate drops down to 1.26% APY for a blended one year APY of 1.51% APY.

I never thought I'd see the day when average rates would go to 1% APY but at this point we're getting awfully close.

CD Rates

The average 1-year CD dropped from 1.61% APY to 1.57% APY. First City Bank continues to hold the top spot with a 1.80% APY CD. First City Bank is in bad financial shape and has been operating under a FDIC Cease and Desist Order since 10/09. Tennessee Commerce Bank maintained the second spot at 1.70% APY.

The average 3-year CD rate also dropped by 2 basis points from 2.47% APY to 2.45% APY. The top spot continued to be occupied by USAA Federal Savings Bank, which offers a 2.65% APY CD with a minimum deposit of $175,000. The next highest rate is Acacia Federal Savings at 2.50% APY and a $500 minimum deposit. Acacia dropped their rate this past week from 2.65% APY.

The average 5-year CD rate dropped the most over the past week moving from 3.17% APY to 3.12% APY. We infrequently see the 5-year drop by more than the other shorter terms.

USAA continues to have the top rate at 3.31% APY. Everbank which holds the second highest rate dropped from 3.30% APY to 3.25% APY. Two weeks ago Everbank was offering the same CD for 3.39% APY.

The Market and Interest Rates

The recent volatility in equity and bond markets has dampened some of the rate pressure from a strenghening economy. Whie Treasury yields rose today with the stock market surge and the news of Europe bailing out debt-ridden economies, Treasury yields are still lower than they were several weeks ago. Throw in jitters about sovereign debt default and yo-yo-stock markets, and repeated statements from Bernanke that rates will remain low for an extended period, and you have the environment that could push savings rates down to 1% APY.

The chart below shows that while the spread between different deposit accounts is still high but is flattening or coming down. The spread between savings and 3-year CD rates has dropped for the past six weeks. While savings rates have continued to come down, 3-year CD rates are coming down even faster. The ratio between 1-year CDs and 5-year CDs has remained steady over the past month.

Sallie Mae Bank today raised their savings account rate from 1.25% APY to 1.40% APY. That represents one of the few rate increases we've seen over the past six months. The 1.40% rate makes it much more competitive on the BestCashCow rate tables and it is the second highest rate for accounts with no minimum balance.

Sallie Mae Bank entered the online savings space relatively recently. Key savings account features include:

• No minimum balance
• No monthly fees
• Daily compounding interest
• Linkage with Upromise that provides a 10% match on Upromise earnings.

The application supports joint accounts and is fully electronic. Once the application is approved you'll receive a welcome letter via email with login information. Deposits are done via ACH with an account you choose to link. The linkage process if verified by two small trial deposits that are made to the external linked account. This is standard online banking procedure and the more automated way to link and transfer funds.

Sallie Mae Bank has three out of five stars from Bauer Financial for its safety and soundness. The bank is FDIC insured and according to the FDIC has $7.9 billion in deposits as of Dec 31, 2009. The bank is part of student loan lender Sallie Mae.

The Fed released their FOMC statement yesterday and it contained the phrase we've become accustomed to: "...low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

That means that savings and cd rates will continue to offer rock-bottom rates at least through 2010 and perhaps beyond. Indeed, rates continue to decline even as the economy seems to be sputtering to life. So, what's an income oriented investor going to do? I'd recommend going out a bit longer with a portion of your money to perhaps a 3 or even 4 year CD. Rates have been low for almost two years and many investors have stayed short waiting for inflation and rates to pick up. Hasn't happened and it may not happen for some time. Indeed, bond vigilantes seem to have given up on the US and are conceding rates may stay down for some time.

I'd also look at municipal bonds. Yields are way down because of the flood of money into munis but the composite muni rate for a 10-year bond is 4.56%, after tax advantages are factored in.

Many of my friends have begun to buy dividend stocks, which can generate 5-6% per year and are more tax advantaged that deposit income. And if the stock market keeps going up, you can get the capital appreciation also. Sean Riskowitz lists many good dividend stocks worth taking a look at.

Of course, none of those investments come with the security of FDIC insurance. If you do want to stash your cash in a bank for a period of time, then check out the savings and cd rate rate tables to be sure you are getting the highest rate on your money.

The Fed's not going to help you out so you need to help yourself.

Below is the full text of the FOMC statement:

Information received since the Federal Open Market Committee met in March suggests that economic activity has continued to strengthen and that the labor market is beginning to improve. Growth in household spending has picked up recently but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures is declining and employers remain reluctant to add to payrolls. Housing starts have edged up but remain at a depressed level. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.

In light of improved functioning of financial markets, the Federal Reserve has closed all but one of the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities; it closed on March 31 for loans backed by all other types of collateral.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a build-up of future imbalances and increase risks to longer run macroeconomic and financial stability, while limiting the Committee’s flexibility to begin raising rates modestly.