The balances on certificates of deposit with terms of three years or more and are under $100,000 are most likely to drop in reaction to Federal Reserve Board rate moves, according to research firm Market Rates Insight.
The San Anselmo, Calif.-based firm examined the relationship between the Fed effective rate and balances of liquid accounts and term accounts of less than three months, three to 12 months, one to three years, and over three years, under and over $100,000. The analysis covered a period of six years from the first quarter of 2004 to the fourth quarter of 2009.
In March 2004, the Fed effective rate was 1% and the national balance for this product was $70 billion, according to MRI. In December 2006, the Fed effective rate was 5.25%, and the balances for this type of CD went down to $41 billion. When the Fed effective rate went down again to 0.12% in December 2009, the balances for these CDs went up again to $104 billion.
"Now is the time for institutions to start developing rollover and conversion plans for this type of CDs," said Dan Geller, executive vice president at MRI. "It is inevitable that the Fed will increase its rate at some point, and when this happens, institutions should expect to lose about 10% of this product's balance for every 1% increase in the Fed rate."