This week the discussion continued about whether the Fed's 0% rate policy is leading to the creation of asset bubbles. Chinese and Japense central bankers went on record as stating that the Fed's policy has already led to asset bubbles in Asia that could create global imbalances. In particular, they were referring to the carry trade, in which investors borrow money in a country with low interest rates and invest it in a country with strong asset price growth or higher rates of return. "Liu Mingkang, China’s chief banking regulator, said that the combination of a weak dollar and low interest rates had encouraged a “huge carry trade” that was having a “massive impact on global asset prices”….

Bill Gross from Pimco probably got it right when he said:

"The Fed is trying to reflate the U.S. economy. The process of reflation involves lowering short-term rates to such a painful level that investors are forced or enticed to term out their short-term cash into higher-risk bonds or stocks . Once your cash has recapitalized and revitalized corporate America and homeowners, well, then the Fed will start to be concerned about inflation – not until. To date that transition is incomplete, mainly because mortgage refinancing and the purchase of new homes is being thwarted by significant changes in down payment requirements. The Treasury as well, has a significant average life extension of its own debt to foist on investors before the Fed can raise short-term Fed Funds."

The only good news for savers is that inflation for goods and services remains relatively subdued. The CPI rose by .3% in October. The index has decreased by .2% over the past 12 months. Leading the increase in October was energy and automobiles. While energy prices will probably continue to rise, look for auto prices to fall back now that cash-for-clunkers is over and the government is no longer subsidizing car purchases. Overall though, there is nothing on the goods and services inflation front that would push the Fed to raise rates.

The only inflation seems to be in assets and Bernanke doesn't believe this presents a problem at the moment.

CD and Savings Rates

CD and savings rates showed virtually no movement over the past week. The average savings rate according to the BestCashCow rate tables dropped one basis point to a new low of 1.62% APY. That's down from 1.70% APY a month ago. CD rates have mostly stabilized. The average one year CD rate is now 2.08% APY. That's up slightly from the last week and virtually the same average rate that we saw in October. For the fourth week-in-a-row 5 year CD rates held at 3.35% APY.

Looking at the yield ratio we have developed for deposit accounts, we see that the spread between savings rates and 36-month CDs is still close to its 12 month high. While it came down slightly, the trend is still up. This reflects the rate stability in longer term CD rates even as savings rates continue their glacial descent. The story is really the weakness in savings rates and the continued 0% Fed rate policy. That's driving the ratio. Banks are still awash in cash and cheap money from the Fed and the Fed's policy of keeping rates low for an extended period of time is going to drive this ratio higher.

It's still hard to recommend putting money into anything longer-term than a 12-month CD, especially with soaring equity markets and signs that the economy may be coming back to life. For those worried about interest rate risk, cd laddering may be a good way to smooth out the return you receive from your CD portfolio.

Mortgage Rates

Mortgage rates have declined over the past three weeks, touching lows not seen since last April when the Fed began buying up mortgage backed debt. According to the BestCashCow rate tables, the average 30-year fixed rate mortgage is now below 5% at 4.901%. The fifteen-year fixed rate mortgage average is 4.373%, close to the all-time low.

What one hand giveth, the other taketh. And so it is that savers are subsidizing borrowers. I could provide a scathing commentary on this but will simply say that if you can't beat them, join them. If you are looking to buy or refinance, now is another great opportunity to do so. You can compare the best mortgage rates in our new Mortgage section.

Bank of America is offering a Special Rate Savings Account that pays 1.5% APY, guaranteed until April 1, 2009. The money is totally liquid and can be withdrawn at any time via the branch, ATM, check, or online. You can also add money to the savings account up until the April 1 deadline.

According to the BestCashCow rate tables, this is moderately competitive compared to the other top savings rates. Still, the guaranteed rate makes this attractive and the 1.5% APR looks pretty good when compared to the best 3-month cd rates and 6-month cd rates. In essence, you are getting a liquid CD that pays near the top of the short-term CD rate ranges.

The "special rate" is available online only for new or existing Bank of America checking account customers who open a new Special Rate Money Market Savings account with a minimum of $10,000. Special 1.50% rate applies only to balances between $10,000 and $250,000 from November 7, 2009 to April 1, 2010. The APY for balances under $10,000 is 0.90% as of 11/06/09. The APY for amounts $250,000 and over is 1.15% as of 11/06/09.

After April 1, the Special Rate Money Market Savings account automatically converts to a Growth Money Market Savings. As of today, November 17, the Growth Money Market Savings Account was offering a .95% APY on balances over $25,000. A bonus APY of 1.20% APY applies if a credit is received into the Growth Money Market each month via one of these three ways:

• An automatic transfer of $250 or more from your Bank of America checking account
• An automatic transfer of the monthly interest payment from your Bank of America CD
• A direct deposit of $250 or more.

The account has a tiered rate system so there are lower minimum balances but the APY is also lower. 1.2% isn't bad but it's starting to get low for a BestCashCow covered account. I think once the Special Rate expires savers should compare all of their options.

The account can only be opened online.

The big news this week from the economic rate front is that the Fed reaffirmed its commitement to keep interest rates low for the foreseeable future. The news sent the stock market soaring, with the Dow hitting a 52-week high of 10,291. We now know that the Fed's easy money policy has indeed been successful at re-inflating the stock and commodity markets. Your mutual fund statements should be looking better than they did last March.

The good news for investors is bad news for savers. Savings rates continue to drift lower and while CD rates have stabilized, yields in the 1-3% range is hardly anything to cheer about. As I've written before, the only mitigating factor is that inflation is low, increasing the real relative deposit return.

CD and Savings Rates

The average savings rate according to the BestCashCow rate table dropped to a new low of 1.63% APY. That's down from 1.65% the week before and from 1.72% a month eariler. CD rates have mostly stabilized. The average one year CD rate is now 2.06% APY. That's the same average rate that we saw in October. Five year CD rates are currently at 3.35% APY down minimally from 3.39% APY in October.

Looking at the yield ratio we have developed for deposit accounts, we see that the spread between savings rates and 36-month CDs reached a new high two weeks ago. While it came down slightly, the trend is still up. This reflects the rate stability in longer term CD rates even as savings rates continue their glacial descent. The story is really the weakness in savings rates and the continued 0% Fed rate policy. That's driving the ratio. Until we see an actual increase in longer-maturity CDs, there's no reason to think there's an uptick in inflation or rate pressure. Banks are still awash in cash and cheap money from the Fed.

It's still hard to recommend putting money into anything longer-term than a 12-month CD, especially with soaring equity markets and signs that the economy may be coming back to life. For those worried about interest rate risk, cd laddering may be a good way to smooth out the return you receive from your CD portfolio.