The fact that the federal government continues to subsidize the economy means the certificate of deposit rates will stay in the doldrum levels for the foreseeable future. CD rates have been rummaging in the bottom of a historical rate trough ever since 2009 when the Federal Reserve stepped in and started bolstering up the public markets. It was part of a strategy to get people to start spending again and investing in companies; the Fed was not interested in helping savers since they would keep money out of the market and hold back a recovery.
There was a lot of talk and chatter in 2013 about the Federal Reserve finally stepping back from its mortgage-backed securities purchasing program, but the Reserve chiefs decided that a bit more time was needed into 2014 before the tapering of purchasing would begin.
As a result, CD rates have continued to stay under 1 percent, barely providing something more than generic savings account rates. The average big banks or popular online banks are still offering rates below a half percent or less. Only CDs that involve a commitment of funds for five years or longer are paying 2 percent or better, and it takes some shopping around to find them in smaller community banks. The average long term offering sits between 2 and 2.05 percent, depending on the institution and most require at least a $1,000 opening deposit. Motivated investors might find some limited time offerings of well above average rates for medium or short term CDs in a bank’s effort to raise some deposits quickly, but those exceptions are rare. A quick search on bank rate.com will quickly reveal some of those deals, but careful consideration of other metrics such as penalties, fees, and bank reputation is recommended, before any money is invested.
Many expect with the continued increase in the economic recovery, CD rates will eventually begin to climb again in 2014. That means a number of depositors will likely redeem their current CDs early, even with penalties, and reinvest them in better paying ones. No surprise then, that would kick off a new round of competition between banks and savings institutions, trying to draw customers away from each other.
However, if the economy decides to go through a double-dip recession in 2014 instead, CD rates are likely to stay at their basement levels as the Federal Reserve will surely maintain the subsidy program to protect the big credit institutions. More folks will move their funds over to mutual funds and stocks and bonds to see better gains.
Although CDs might still be the right safety retirement bastion for some, even in the current market, it might be a smart idea to keep some alternatives open, such as government bonds or conservative mutual funds. CD rates are still primed to disappoint for the next two years at least.