Now That the Election Is Over, What Can Savers Expect Over the Next Year?

Now That the Election Is Over, What Can Savers Expect Over the Next Year?

Rate information contained on this page may have changed. Please find latest savings rates.

With Obama's re-election to a second term, Bernanke's job as Chairman of the Fed is now safe. Akin to what Bernanke's been doing, the Fed will most likely continue to keep rates low and print more money.

In September 2012, the Fed said it expects to keep short-term interest rates near zero until 2015, and to continue its Operation Twist policy to suppress long-term rates well into 2013.   In addition, the Fed is now undertaking QE3 through which it is pumping $40 billion each month into the struggling economy through mortgage bond purchases.

The arguments made for keeping rates low were due to concerns about high unemployment rates and “strains in global financial markets” and that low rates will stimulate more economic activity. In theory, in a low rate environment, consumers will be induced to borrow and to spend, but the economy has yet to recover its footing in a way that enables the Federal Reserve to abandon this policy.  Rather, unemployment is still at a record high and the economy really has not gotten much better.  Nevertheless, the Fed, by insisting to keep rates low, is bidding for some progression in the story over the next few years.

Many are concerned that the expansion of the Fed balance sheet as a result of its monetary policies will become inflationary. As of now, inflation has been in check due to the declining velocity of money with the public sector and corporations cutting back on debt. Public sector borrowing will most likely be further reduced in 2013 through spending cuts and tax increases, slowing the velocity of money even more, and helping to keep inflation in place.  

Even if savers are not worry too much about inflation at the point, what does a continuation of a zero interest rate policy really mean to them? Low rates mean that yields cannot go any lower, and with virtually no return, there is no reason to park any money in bonds. Eventually, all the money that the Fed is pumping into the economy and low rates for savers could result in still higher stock prices. 

Commodities too represent a particularly sensitive area in 2013.  As the Fed continues to print money in support of its quantitative easing policy, the dollar will most likely remain weak.  With Obama’s reelection, some pundits are calling for gold as high as $3,500 per ounce and silver over $100 per ounce by the end of 2013.   Yet, commodities too bear risks, and a significant collapse in China or India or continued weakness in Europe could cause them to fall dramatically.

Ultimately some savers will take more risk in areas like equities and commodities as low rates continue for a longer and longer period, but many savers will become accustomed to lower rates and make necessary adjustments in their expectations in order to safely get through 2013.


Savings and CD Rate Update - November 13, 2012

Savings and CD Rate Update - November 13, 2012

Rate information contained on this page may have changed. Please find latest savings rates.

Savings and CD rate trends, the impact of the fiscal cliff on savers, and my weekly rate forecast.

Savings and CD rate averages continued to decline last week, with the one year CD average falling from .419% to .418% APY. Five year average CDs fared even worse falling from 1.204% APY to 1.196% APY. Online savings rates from the banks offering the top 30 nationally available rates remained steady at .732% APY for the seventh week in a row.

Election Impact on Savers

With the election over we can now look towards the fiscal cliff as the next big event that may impact the fortune of savers. Here are a couple of scenarios and some thoughts on how each one might impact savers.

  • We go over the cliff. Taxes will rise across-the-board, including on income from savings and CDs. As a result, the already meagre gains from money in the bank will become even smaller. As the economy slows from tax increases and spending cuts, the government will keep interest rates pegged at record low rates for an even longer period of time.
  • The cliff is averted via a temporary detour. Congress and the President decide that in this lame-duck period (for Congress) to bypass the fiscal cliff and put in a temporary respite from tax increases and budget cuts. This will maintain the status quo. Rates will remain low for an extended period of time (perhaps through 2016) on deposit accounts but no significant new taxes will be taken out of income.
  • A grand bargain is struck to avert the cliff. A grand bargain is potentially the best outcome for savers, depeneding on the contours of the deal. A compromise would show that the government can still function and boost confidence in the economy. Most of the compromises being discussed now would not increase income taxes on the vast majority of savers. So, increased confidence and little to no tax increase may result in higher rates in the medium term as the economy continues to grow and recover from the financial crisis of 2008.

Savings Options

Should a saver open a savings account or a CD? A shorter-term CD or a longer one? The chart below shows the comparison between the yield of a 5-year CD and a 1-year CD. Notice that this difference has shrunk considerably over the past year as the yield on 5-year CDs has dropped by more than the yield on a 12-month CD. This drop continued last week.

Not much has changed with the various product spreads. While the spread started the year at 1% or 100 basis points, it is now .778%. As a comparison, in 2008, this spread stood at .43% while in 2010 it went as high as 1.56%. So right now, it's somewhere in the middle. Why does this matter? Because back in 2010 banks were paying a saver a lot more to invest in a 5 year CD versus a 1 year. Today, banks are giving about half the premium they did a few years ago to lock up your money for 5 years. In 2012, I advised savers to consider investing in 5-year CDs because of this premium: the economy looked stuck for quite some time, and inflation did not appear to be a problem. Now, with the premium down, and the economy growing (albeit not that fast) it's a bit of a harder case to make. If the government takes the economy over the fiscal cliff, then it makes sense to put money in longer-term CDs as the potential for another recession becomes much higher. If a compromise can be reached, I'd invest in shorter-term CDs. Consumers might want to consider laddering their CD portfolio in this rate environment.

What about the comparison between savings and CDs?

This spread has actually been growing. Online savings rates have, for the most part, maintained their rates while CD rates continue to fall. For short term savings, it appears to make more sense to park money in an online savings account versus a CD. Online savings accounts have remained very stable over the past year.

Interest Rates

My rate prognosis depends on what happens with the fiscal cliff. The most likely scenario is that a temporary fix is put in place that averts a jump in taxes and cuts due to sequestration. Based on that, I believe that:

Rates will continue to drift lower for the next 12 months. After that, it's hard to tell. I suspect that rates may go up before 2015.

For now though, savers can make the best of a tough situation by getting the very best rates on their money. Remember, even in today's environment, there is competition for your cash.

I hope this is helpful. If it is, let me know and I'll keep writing. Drop me a note or post a comment below.

Have a nice week. Until next week...


Savings and CD Rate Update - October 26, 2012

Savings and CD Rate Update - October 26, 2012

Rate information contained on this page may have changed. Please find latest savings rates.

My weekly recap of savings and CD trends as well as news that might impact rates going forward. Happy Halloween.

 

Savings and CD rate averages continued to decline last week, with the one year CD average falling from .428% to .425% APY. Online savings rates from the banks offering the top 30 nationally available rates remained steady at .428% APY. As the chart shows, average CD rates have headed inexorably lower while average online savings rates as followed by BestCashCow have remained somewhat steady over the past year.

Should a saver open a savings account or a CD? A shorter-term CD or a longer one? The chart below shows the comparison between the yield of a 5-year CD and a 1-year CD. Notice that this difference has shrunk considerably over the past year as the yield on 5-year CDs has dropped by more than the yield on a 12-month CD.

While the spread started the year at 1% or 100 basis points, it is now .793. As a comparison, in 2008, this spread stood at .43% while in 2010 it went as high as 1.56%. So right now, it's somewhere in the middle. Why does this matter. Because back in 2010 banks were paying a saver a lot more to invest in a 5 year CD versus a 1 year. Today, banks are giving about half the premium they did a few years ago to lock up your money for 5 years. In 2012, I advised savers to consider investing in 5-year CDs because of this premium, becasue economy looked stuck for quite some time, and because inflation did not appear to be a problem. Now, with the premium down, and the economy growing (albeit not that fast) it's a bit of a harder case to make. Consumers might want to consider laddering their CD portfolio in this rate environment.

What about the comparison between savings and CDs?

This spread has actually been growing. Online savings rates have, for the most part, maintained their rates while CD rates continue to fall. For short term savings, it appears to make more sense to park money in an online savings account versus a CD.

Note that research I conducted and subsequently published in the Wall Street Journal (The Hunt for Higher Bank Yields) concluded that when considering where to deposit money, consumers will get the best savings account rate from an online bank, and the best CD rates from local, brick and mortar banks. That's why I've used online savings and money market accounts for this analysis.

Interest Rate Outlook

So, which way rates? In its FOMC statement released on October 24, 2012, the Fed reiterated that it plans to keep rates at 0% at least through 2015.

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.  In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.

Inflation remains low, unemployment high, and economic activity subdued. In addition, reports to us from banks continue to indicate that most of them have more deposit money than they know what to do with. As the Fed drives down the yield on Treasuries by extending the maturities it holds, it will require banks to lower their deposit rates. Many banks are parking their excess cash in Treasuries. Eric Dash and Nelson D. Scwartz did a nice article on this for the NY Times: Banks Flooded with Cash They Can't Profitably Use.

There is hope, albeit dim, on the horizon for savers. The economy is growing with housing showing some strong gains in sales and prices. After four years of a housing crush we may be finally making some progress. Marketwatch also had an article (Countdown to Change at the Fed) on how the election might change the dynamic at the Fed. No matter who wins, Chairman Bernanke will most likely be departing soon and the new Chairman may be more inclined to raise rates.

Bloomberg published an interesting article entitled Sorry, U.S. Recoveries Really Aren’t Different by economists Carmen M. Reinhart and Kenneth S. Rogoff that discusses their research on how economies fare after a recession or depression brought on by a banking crisis. They examined similar recessions/depressions in U.S. history.

"So how many years did it take for per-capita GDP to return to its peak at the onset of the crisis? For the 1873 and 1893 (peak is 1892) crises, it was five years; for the Panic of 1907 (peak is 1906), it was six years; for the Depression, it took 11 years."

Past economic downturns suggest that it takes between 5-11 years to patch up the damage from a banking created crisis. We're now four years into our recovery. The "Great Recession" does not compare to the Depression so let's say 5-6 years is what it will take. That means by next year or 2014 we will start to see some real improvement.

My take: rates will continue to drift lower for the next 12 months. After that, it's hard to tell. I suspect that rates may go up before 2015.

For now though, savers can make the best of a tough situation by getting the very best rates on their money. Remember, even in today's environment, there is competition for your cash.

I hope this is helpful. If it is, let me know and I'll keep writing. Drop me a note or post a comment below.

Have a nice weekend. Until next week...