The two big news events over the last week were the Federal Open Market Committe statement, in which the Fed committed to keeping rates low for the foreseeable future and for kind've slowing its purchase of mortgage backed securties and President Obama's whopping $3.8 trillion budget.

The Fed, as it has for the last year, committed to keeping the Fed Funds rate pegged close to 0%. At the same time, the Fed said that it was beginning to slow its purchase of mortgage backed securities.

" To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter. The Committee will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets."

That's the way to sit on the fence.

I've been expecting mortgage rates to begin to rise with this announcement but the opposite has happened over the last month. After peaking at close to 5.2% in late December, mortgage rates have come down and are now once again below 5%. This is a gift for those that want to purchase or refinance a home.

Many still predict that as the Fed lays off the MBS juice, mortgage rates will begin to go higher.As I wrote last week, low rates are both a benefit and a boon. You'll have to decide if getting a low rate is worth the risk that your house will lose value once rates start to move up.

President Obama's budget is also front and center to our rate discussion. $3.8 trillion is a lot of money and the budget shortfall is expected to reach a record $1.6 trillion in 2010 with whopping deficits going out beyond the horizon. What does that mean? More issuance of Treasuries. Eventually the market will be flooded with US debt and unless corrective action is taken, which seems doubtful, we're all looking at longer-term interest rates.

Right now though, higher interest rates would be welcome news for the savers of the world.

CD and Savings Rates

Most savings and CD rates hit record lows last week. Average savings rates reached a new record low of 1.47% APY, down 4 basis point from 1.51% APY the previous week. Average one-year cd rates showed the largest drop, falling 10 basis points to 1.85% APY. Average three-year cd rates dropped four basis points to 2.63% APY. The only glimmer of good news were five-year CD rates which increased from 3.18% APY to 3.20% APY.

Like the Treasury yield, BestCashCow has developed its own yield ratio for deposit accounts (a short duration deposit account) and 3 year CDs. As the chart below shows, the yield has been on the rise and is currently at 1.16. This is the second highest reading since we began compating this data. The yield ratio continues to mimic the Treasury yield curve, which is low on the short end and rises on the long-end.

At this point it's still hard to recommend putting money into anything longer-term than a 12-month CD, especially with rising rate risk. CD laddering may be a good way to smooth out the return you receive from your CD portfolio. Several banks have come out with breakable CDs, that allow users to withdraw money penalty free, and still other banks are lowering the withdrawal penalty, as Ally Bank recently did, for removing money before maturity.

An article in CNN Money piqued my interest. It states that many banks are worried about a future of rising rates on deposits. As the article states:

"Lenders have benefited handsomely as a result, borrowing money cheaply and making long-term loans with healthy profit margins. But expectations are growing that the nation's central bank will soon reverse its loose monetary policy stance in an effort to tamp down the threat of inflation."

Regulators are worried that when this dynamic reverses itself, many banks will face financial problems and some could fail. In its quarterly conference call last week, Wells Fargo said it expects a rapid increase in rates sometime in the future. This would be troublesome to smaller banks that don't have the interest rate hedging tools employed by their more sophisticated, larger counterparts.

The best way to counter this interest rate risk is to lock as much of their deposit portofolio into longer term CDs. As a result, I expect we'll see many banks promoting 3-5 year cds and loosening early withdrawal penalties. Banks know that once a consumer opens a CD, inertia often keeps them in it regardless of the relative rate. Ally Bank recently lowered their early withdrawal penalties.

Some of the bigger banks may even benefit from rising rates. Wells Fargo stated that they are not deploying their cash not, but are keeping their powder dry in anticipation of higher future loan rates. Why lock money up in a 30 year mortgage paying 5% when they might be able to get 6.5% or even 7% in a year or two?