February 27, 2009 Update
Rates continue to drop. While the drop is not as great as immediately following the Fed cut to 0-.25%, the direction is still down, with the average as reported on the BestCashCow rate tables dropping 5-15 basis points each week. This contrasts markedly with last fall, when banks were actually raising rates while the Fed was dropping. Why the difference? While banks were desperate for deposits last fall at the height of the financial meltdown, they are now awash in cash. At the same time, many banks are shrinking their balance sheet, decreasing their need for deposits.
- In the fourth quarter of last year, the FDIC reported that total deposits increased by $307.9 billion (3.5%), the largest increase in 10 years. Cash has flooded into banks as investors look for the safety of FDIC insured accounts and a higher yield then what they are able to get via Treasuries.
- Two weeks ago, Clear Sky Accounts from Chesapeake Bank stopped taking savings applications in response to the flood of money that was deposited in the bank. Doral Bank stopped taking deposits nationally and restricted account openings to NY/CT/NJ.
As we discussed last week, the saving grace in the steady parade of rate decreases is the drop in inflation. As the chart below shows, the decline in inflation has cushioned the decrease in deposit rates over the last five months.
Inflation is a savers enemy while deflation (while negative to the overall economy) is positive for those holding cash or cash equivalents.
Now, back to the rates. The changes from last week are:
- Savings Accounts: 12 basis point drop from 2.69% to 2.57% APY
- 1 Year CD: 6 basis point drop from 2.82% to 2.76% APY
- 3 Year CD: 8 basis point gain from 3.19% to 3.11% APY
- 5 Year CD: 6 basis point drop from 3.60% to 3.54% APY
Note: 100 basis points represents 1%. Thus a drop by 100 basis points would be a drop from 4% to 3%.
Here are the rate of drops since the Fed dropped rates, in percentage points.
- Savings Accounts: -.07, -.05, -.11, -.04, -.05 , -0.07, -.03, -11, NA, -16, -12
- 1 Year CD: -.14, -.24, -.16, -.11 , +.08 , -.40, +.02 , -0.03, NA , -10 , -6
- 3 Year CD: -0.0, -.33, -.13, -.09, -.16 , -.13, +.06 , -.02 , NA , +2 , -8
- 5 Year CD: -.01, -.36, -.08, -.01 ,- .17 , -.18, +.08 , -.04 , NA , -8 , -6
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Related Articles:
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DollarSavingsDirect Raises Online Savings Rate to 4% APY by Sam Cass - Oct 10, 2008
The Savvy Investor Can Dramatically Increase Safe Returns in Minutes by DanS - Apr 22, 2009.
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