One of the most disappointing realities for savers right now is that high CD rates are hard to find. Sure, you can get CDs with the highest rates, but even the highest rates now are much lower than the yields you could see back before the 2008 financial crisis. Indeed, CD rates are much lower now, thanks to the economy — and the measures being taken to help stimulate the economy.
Economic Stimulus: Not Great for Savers
The truth is that economic stimulus is not great for savers. For the most part, economic stimulus measures involve lowering interest rates in order to make borrowing (and spending) more attractive. This can be accomplished, in the U.S., by having the Federal Open Market Committee reduce the Fed Funds Rate (the target rate for banks lending to each other), or through quantitative easing, in which the Fed buys Treasuries, and may also purchase private assets, in an attempt to further depress interest rates.
Of course, active efforts to keep interest rates lower mean that savings yields are going to suffer. There aren’t incentives for saving money during a period of economic stimulus. Since about 2/3 of the U.S. economy is accounted for by consumer spending, it makes sense that officials want to make saving less attractive.
Ben Bernanke, the chairman of the Federal Reserve Board, has expressed his desire to keep the Fed Funds Rate quite low until at least 2013, and QE3 was just put into effect with Operation Twist, so you can imagine that yields on cash products are going to be quite low — including CD rates.
Getting the Best CD Rates
Of course, just because our monetary leaders want you to borrow money at low rates and eschew saving doesn’t mean that you have to. While you won’t see the same types of yields that were available four years ago, you should still shop around for the best CD rates. You can consider jumbo CDs, longer-term CDs, and IRA CDs to help you squeeze a little better yield out of your money.
In the meantime, it helps to be prepared. For now, official inflation rates are pretty low, so the low CD rates aren’t as big a deal. However, all of the attempts at economic stimulus might have an effect — it might mean a rise in inflation. You want to be ready for that, but taking measures to ensure that you can get into newer CDs later. As inflation rises, interest rates are likely to go up as well. While monetary policy leaders like to see some inflation, they also want to keep it in check to a certain degree so that it doesn’t get too out of hand, and higher interest rates are one way to keep inflation in check, since it encourages saving behaviors.
So, as you create a CD strategy, make sure you consider the economy. While you can’t totally predict what will happen next, you can make contingency plans, and you can prepare for what might be a period of high inflation later. And you might just have to resign yourself to waiting a little longer for the economy to pick up if you want higher CD rates.