Savings and CD Rate Update - January 20, 2012

CD rates continued to fall while online savings rates held steady for the fourth week in a row. One year average CD Rates dipped below the .400% threshhold, moving down to .398% APY. Three year average CD rates dropped to .785% APY versus .742% APY for online savings accounts. Based on the current trends as the chart below shows, online savings rates will soon pay more than 3 year CDs. Five year average CDs had another large drop in the past week moving from 1.147% to 1.139% APY.

There has been some movement in the top online rates.

• Savings: Salem Five Direct remained steady at 1.25% APY
• 1 Year CD: CIT Bank at 1.05% APY. ableBanking lowered their one year CD from 1.12% APY to 1.00% APY, making CITs 1.05% APY 12 month CD the top spot.
• 3 Year CD: CIT Bank at 1.44% APY
• 5 Year CD: CIT Bank - 1.85% APY. Nationwide Bank, which shared the top spot with CIT, dropped their 5 year CD from 1.85% to 1.75% APY.

Last week we also added Rewards Checking Accounts to our tables. For those that don't know, Rewards Checking Accounts offer significantly higher interest rates up to a certain balance in return for the holder undertaking a series of activities over the course of the month. The typical Rewards Account might require that the user attach direct deposit to the account, use their debit card 10 times, and agree to receive electronic statements. The bank basically wants to ensure that the Rewards Account is being used as a primary checking account.

The top nationally available rate comes from Hope Community Credit Union. They offer a 3.51% APY rewards rate up to $10,000. To get that rate, you must do the following:

• 12 check card purchases post and clear each month.
• Have 1 Automatic Payment or Direct Deposit post and clear
• Receive your account statement electronically
• Sign in to your online banking account at least once

Most credit unions have restrictive fields of membership, which means you must live or work in a certain area, or belong to a certain organization to join. But Hope Community is a community development credit union and has an open field of membership. Anyone can join.

Rewards Checking Accounts offer the higher rates but you have to be willing to treat it as an online checking account. Most banks will reimburse ATM fees and with direct deposit, the accounts can function quite smoothly if you don't need to visit a branch often.

If you want a rewards account close to home, look for banks that offer rewards checking accounts in your local area or state. We'll be adding more to our database in the next couple of weeks and if you know of any that should be on the list but aren't leave us a comment.

The chart below shows the trend in average rates since October 2012.

The difference in the rate of decline between online savings and CD rates can be viewed on the chart below, which shows the spread between online savings account rates and 12 month CDs. The spread hit another high last week of .344 percentage points. On average, online savings account rates pay .344 percentage points more than 1 year CDs, up from .23 percentage points more at the beginning of last year.

General rate environment

My forecast remains unchanged from last week. I am forecasting that rates will continue to gradually move lower in 2013. My reasoning includes:

• The Fed has committed to keeping rates exceptionally low as long as unemployment is above 6 1/2 percent. It currently stands at 7.9%. At the current rate of decline, it will take at least 2-3 years to get to 7.9%. If the economy picks up, it could get there sooner.
• The economy has picked up a bit of steam in the last couple of quarters. But GDP growth of 1-2% will not be enough to quickly bring down the unemployment rate. I project steady but moderate economic growth of around 2.5% in 2013.
• Bank are awash in cash from individuals and corporations and do not need more deposit dollars. Third quarter 2012 FDIC data showed banks had over $9 trillion in deposits, up from $8.5 trillion in the third quarter of 2011. Many banks are having trouble figuring out how to deploy their cash. Part of this is because of lending fears and credit quality and the other part is due to increased governmental oversight.
• Demographic trends are unfavorable. Unfortunately, the United States has entered a demographic slide. As the large baby boom generation ages and retires, this puts a large strain on the country's productivity and spending. I believe that demographics is a general driver of economic development. A young population lifts all boats. An aging will leave quite a few boats stranded and make it difficult for the others. Japan and Europe have even worse demographic problems and their economies reflect that. As China's population ages, look for its growth to ebb. This demographic slide will be a factor for the next ten to twenty years, not stopping growth, but certainly acting as a headwind.
• Government grid-lock over the debt ceiling and sequestration. Gridlock continues and although unlikely the U.S. could begin to default on its obligations if the debt ceiling is not raised. Either way, the partisan bickering does little to establish confidence.

Potential positive Black Swans (unforseen events that could skew the forecast). Read my article from several weeks ago on Black Swans and how they impact forecasts.

Negative:

• A major natural disaster, pandemic, or terrorist attack.
• A major bank collapse in Europe, China, or Japan.
• War in the Middle East (not exactly unforseen)
• A major political change that causes conflict or threatens established institutions

Positive:

• A technology break-through related to energy, medicine, communications, transportation, or some other field.
• General lifting of pessimism.

If you have any more Black Swans, post them below. I'm an optimist so I'd like to think that progress and achievement will win out. It's why I'm banking on rates going up in the next 12-18 months. Minus any major black swans, here is my savings rate forecast for 2013.

My outlook: Savings rates will continue to drift lower for the next 12-18 months before beginning to move higher. How high and how fast they move will depend on the government's ability to stop bickering and resolve their budget and borrowing disputes, the continuation of a recent economic uptick, technological advances, and the ability of Europe to put its woes behind it and resolve its fiscal problems.

Check in every week for a discussion of these factors are changing and how they impact my rate forecast. Feel free to comment with your thoughts below and add any potential Black Swans that may change the course of the economy and rates.

Savings Accounts or CDs?

The data shows that opening a savings account is a better bet than a 1-3 year term CD and I expect this to hold through 2013. Many online banks have raised their savings rates over the past six months while CD rates continue to fall.

So for now, here are my recommendations:

For money you want to keep liquid, go with online savings accounts. They offer better rates than 1-3 year CDs and have shown good rate stability over the past year.

For longer-term money, look to open 4-5 year CDs at local community banks. BestCashCow research has shown that community banks and credit unions offer the most competitive rates on longer-maturity CDs.

I believe this is the best and easiest strategy for keeping your cash liquid and maximizing your savings over the next year.

Make the best of a tough savings situation in 2013

Yields may be low in 2013 but a savvy saver can boost the return with no increase in rate by rate shopping. By shopping around, a saver can earn an extra half to full percentage point. On $100,000, that's $1,000 in extra cash per year. Remember, even in today's environment, there is competition for your cash.

As always, I welcome your thoughts and comments.