CD Buyers Will Suffer

When the Federal Reserve meets and changes rates, we all have questions: What does it mean to me? Will yields on certificates of deposit go up or down? Bankrate is here to help. We've looked at five categories -- mortgages, home equity loans, auto loans, credit cards and certificates of deposit -- to determine if the Fed's moves made you a winner or a loser. Here's a look at CD and money market accounts:

CDs and MMAs

Loser: Certificate of deposit buyer
We've watched CD yields fall by very small amounts throughout the year. In recent weeks, the drops have escalated from 1 basis point or 2 basis points earlier in the year to 10 to 15 or even more basis points each week. This 50-basis- point cut by the Federal Reserve will accelerate that trend. Bankrate's latest survey shows that the average three-month CD is yielding 2.82 percent. The average for one-year CDs is 3.13 percent, and 3.47 percent going out five years. With inflation running at about 4 percent, these average CD yields aren't a good investment at all.

High-yield CDs are a better deal. They still won't give you much of a return, but at least you'll end up with as much, or perhaps a little more, spending power than the cash you deposited. As of this writing, Bankrate's high-yield database shows a few banks paying 4 percent or better for three-month, six- month, one-year and five-year CDs.

Also, high-yield money market accounts are holding up pretty well. Bankrate's database shows about 10 banks offering more than 4 percent. Because the accounts are liquid there's no guarantee the banks won't drop their rates to 2 percent tomorrow, but these accounts could be a good, if temporary, option.

Take action
If you've sold stocks and mutual funds in an effort to salvage your portfolio, then CDs may be a place to put your cash if you insist on a guaranteed rate. As much as the Fed may want to see short-term rates move higher to help stave off inflation, it's not likely to happen any time soon. If you're determined to avoid the risk of equities, consider buying CDs with at least a one-year maturity.

If you have a CD ladder and it's time to replace a rung, stick with the plan.

Wednesday's Rate Cut -- Who Stands to Win and Who Could Lose:
Mortgages | Home Equity | Auto Loans | CDs and MMAs | Credit Cards