CD rates mixed this week — some up, some down

Pink piggy bank in a vise

Yields on five-year and six-month CDs made solid gains this week, according to the Interest.com Jan. 2 weekly survey of major banks. But two other popular CDs -- the one-year and three-month -- saw their yields slide.

Unfortunately, the trend in CD yields is a downward one; it's more difficult to find banks offering the great 5% returns we've enjoyed over the past couple of years.

That's because the Federal Reserve Board has now sought to push interest rates on consumer loans and deposits down three times since September, with the most recent rate cut coming on Dec. 11.

While that will allow commercial banks to offer cheaper loans to businesses and consumers, it also means they won't have to pay as much for deposits.

Since the Fed began lowering rates the average rate for a one-year CD has fallen from about 3.9% to 3.51%, according to our survey of major banks.

The number of banks paying 5% or more on one-year CDs also has dropped from more than 40 in mid-September to 10 this week, according to our extensive database of the best CD rates.

That means anyone with money to invest this winter should buy the best-paying 12- to 24-month certificate of deposit available.

You should certainly jump on any one- or two-year CD paying 5% or more.

The Fed is cutting rates to head off a potential crisis and keep the economy expanding.

The financial and housing markets are in turmoil because so many homeowners -- particularly those with poor credit and expensive adjustable-rate mortgages -- are defaulting on their loans.

Those losses have panicked many of the big institutional investors that provide billions of dollars a year for home loans, resulting in a dramatic drop in the amount of money available for mortgages.

With home sales and prices falling in many parts of the country, economists fear that tight credit could be the final straw that pushes the economy into a recession.

The Fed can prevent that because it acts as the nation's super bank, lending money to all the commercial banks we deal with every day. When the Fed lowers rates, banks can obtain the money they need for consumer loans more cheaply.

Indeed, that's what happened. In mid-December the Fed's rate-setting committee reduced the rate it charges commercial banks for overnight loans by a quarter-point after lowering that rate three-quarters-of-a-point in September and October. And more cuts could be on the way.

That will allow banks to charge less for loans, encouraging us to borrow and spend more. This keeps the economy growing since two-thirds of our gross domestic product depends on consumer spending.

Unfortunately all of this also means leaner profits for the savers who also fund those loans through their deposits.

With interest rates going down, you've got to shop around for the best deal every time one of your CDs matures. Don't sit back and let the bank roll your money over into a new CD that's doesn't have the best interest rate available.

Let's say you have a $5,000, 12-month CD. You'll make $180 on it if it pays an average rate of 3.52%. You'll make $257 on the same CD paying a yield of 5.03%.

Can you afford to throw that $77 away?

You must be ready and willing to move your money to a bank across town, across the country, or across cyberspace.

Online banks are just like their brick-and-mortar cousins, except they don't have branch offices. All transactions are done electronically using your computer or an ATM machine, the phone or the good old U.S. mail.

Since they're relatively new they have to offer better rates to get noticed and persuade consumers to give them a try. That's why you'll find them offering most of the top rates on the Interest.com national comparison charts.

Signing up is easier than you might think and the federal government insures your deposits, like it does at most other banks. Just be sure the bank is FDIC insured.