CD Rates Likely to Remain Low for Some Time
Many savers have been rather frustrated over the last couple of years as they watch CD rates continue to drop. Indeed, as the holiday season moves into full swing, CD rates have been falling on average. This trend has been happening since the financial crisis in 2008, and is likely to continue for some time. As long as the economy remains sluggish, and the Fed keeps the Fed Funds rate low, certificates of deposit are likely to continue offering low yields.
Why Banks are Reluctant to Raise CD Rates
Banks make their money by taking the money you deposit into an account and then lending it out to someone else. There are costs involved with this, including administrative costs associated with your bank account, as well as the fact that many deposit accounts pay interest. The rate of interest, though, is so low that it is fairly easy for banks to overcome this portion of the cost by what they charge borrowers.
However, even these higher interest rates are lower, due to the market. Mortgage rates are under 5%, and auto loan rates are quite low as well. Banks can make a good amount of money on credit card interest rates, still, but there are problems in that area, too: Consumers are moving away from credit.
Indeed, banks are seeing falling revenues from credit card interest charges as consumers become more frugal as a result of the down economy. Not only are credit card delinquencies in the U.S. dropping, but people are using credit less, preferring to pay down their debt rather than add to it. This is limiting banks’ income from such sources. As a result, they are cutting what they are willing to pay out on CDs.
Shopping Around for the Best CD Rates
As you might expect, the best thing you can do is to shop around for better interest rates on your CDs. There are some some competitive rates (although what is competitive now and what was competitive three years ago are two very different things). You can find them if you are willing to take a little time to look around for the best deals and highest yields. You may have to look online for the best rates.
Additionally, you can look at other types of CDs. There are a number of alternative CDs, from jumbo CDs to high yield CDs to brokerage CDs. However, some of these certificates of deposit have restrictions that can make it difficult to access some of your money. Additionally, for some CDs bought through brokerages or on the secondary market, your money might not be FDIC insured. You need to carefully consider your options before deciding what to do about a CD.
Eventually, it is possible that we will see some progress made with CD interest rates. Eventually, as the economy recovers, we will begin to see higher interest rates — and higher yields on CDs. But this could be a long way off. Federal Reserve Chair Ben Bernanke has indicated that the economy could be in for a long recovery, and that more monetary easing (which could continue to contribute to lower CD rates) might be in order.
