The FDIC announced two significant pieces of information today: it estimates that the cost of bank failures would rise to $100 billion over the next four years, and that it was going to pre-assess banks today for payments through 2012. The result of this is that the FDIC will have an estimated $45 billion in extra cash to use in insuring bank deposits at failed banks.

FDIC Chairman Sheila C. Bair said, "First and foremost, bank customers should know that their insured deposits have and always will be 100 percent safe, no matter what. This commitment to depositors is absolute. The decision today is really about how and when the industry fulfills its obligation to the insurance fund. It's clear that the American people would prefer to see an end to policies that look to the federal balance sheet as a remedy for every problem. In choosing this path, it should be clear to the public that the industry will not simply tap the shoulder of the increasingly weary taxpayer. This proposal is a vote of confidence for the banking industry's resilience, and it will continue to recover its strength as we work through the significant challenges ahead."

An analysis done by the FDIC indicates that this prepayment strategy is likely to impair bank lending than a special one-time assessment.

If you own banks, look for a one-time hit to profitability as banks make the payment, but increased ongoing profitability. Of course, if bank's financial conditions continue to deteriorate and the Fed has to do a special assessment on top of this pre-payment, then all bets are off.

There were two pieces of information this week that I found quite interesting. The first is an article that explores how bond prices are making the case for inflation or deflation. According to the original article posted on Marketwatch, bond prices seem to indicate that inflation is a greater probabiliy than deflation.

Juxtapose this with the Fed's FOMC statement:

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

There is over $1 trillion in idle capacity in the United States alone and it's hard to imagine prices increases in this environment. Of course, a continued decline of the dollar could eventually spur higher prices as import prices rise.

So, the environment we have discussed in the last couple of weeks is coming into greater relief - rising interest rates in a low inflation, low growth environment. It's not stagflation, it's stagrisingrates.

There was little change in savings and CD rates last week. In fact, for the first time since we began tracking average savings rates, there was no change at all. CD rates barely budged, with the 12-month CD dropping 1 basis point, the 3-year rising 2 basis points, and the 5-year average rising 2 basis points.

Like the economy, rates seem to have pretty much hit bottom. The question now is when they will go back up. It may be some time.

There's no significant change to report in the spread between savings rates and 36-month CDs. That's not surprising considering both rates showed barely any movement. Watch this chart to see who will blink first:: will longer term CD yields come down in the absence of any sign of inflation, or will short term savings and CD accounts rise as the economy strengthens? My guess at the moment is that long-term yields will start to rise even if the economy doesn't improve.

Based on this data, it would seem that any rate increases won't come until sometime in 2010. Nevertheless I would stay short-term and wait. An improving economy and a glut of Treasury debt will eventually put some pressure on rates.

The spread between the average BestCashCow savings rate and 36-month CD rates remains steady as the economy stabilizes and investors, banks, and consumers wait to get the next read on where the economy is going.

The big news last week on the rate front was the general lack of inflation in the economy. The Labor Department's CPI numbers rose .4% in August versus July but from a year earlier decreased 1.5%. At this rate, the Fed is under no pressure to raise rates. Speaking at a seminar in Helsinki today, Nobel award winning economist Paul Krugman said that the US has $1.1 trillion in idle capacity. It's hard to see large price increases in the short-term in the face of such a capacity glut. At the same time Krugman did say that "The consequences of that [a downturn that drags on] are that you start to have problems with financing the debt and you start to have social and political problems."

So could we be faced with rising interest rates even as inflation remains low?

As the charts show, there is no significant change to report with savings rates and CD rates. The average savings rate and 1-year CD rate according to the BestCashCow rate tables stayed the same from the prior week. The average 3-year CD rate dropped by 2 basis points to 2.66% while the average 5-year CD rate rose 4 basis points to 3.37%.

Like the economy, rates seem to have pretty much hit bottom. The question now is when they will go back up. It may be some time.

There's no significant change to report in the spread between savings rates and 36-month CDs. The spread ticked down a bit but nothing that isn't within the normal range of the past few months. Notice that the spread between savings and 3-year CDs that we saw widen in the Spring is still there, a hopeful sign that the economy is poised for expansion. One wonders who will blink first: will longer term CD yields come down in the absence of any sign of inflation, or will short term savings and CD accounts rise as the economy strengthens?

Based on this data, it would seem that any rate increases won't come until sometime in 2010. Nevertheless I would stay short-term and wait. An improving economy and a glut of Treasury debt will eventually put some pressure on rates.

The spread between the average BestCashCow savings rates and 36-month CD rates remains steady as the economy stabilizes and investors, banks, and consumers wait to get the next read on where the economy is going.